<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1999 Commission File Number 0-13617
LIFELINE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2537528
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 Lawrence Street, Framingham, Massachusetts 01702-8156
(Address of principal executive offices) (Zip Code)
(508) 988-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common stock $0.02 par value
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(Title of Class)
Indicate by check mark whether the registrant (i) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (ii) has been subject to such filing
requirements for the past 90 days. Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
As of February 29, 2000, 5,955,900 shares of the Registrant's Common Stock were
outstanding and the aggregate market value as of such date of such Common Stock
held by non-affiliates of the Registrant was approximately $59,559,000.
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Exhibit index is located on pages 44 through 49 of this Report.
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PART I
ITEM 1. Business
General
Lifeline Systems, Inc. (the "Company") provides 24-hour personal
response monitoring services to its subscribers, primarily elderly
individuals with medical or age-related conditions as well as physically
challenged individuals. These subscribers communicate with the Company
through products designed and marketed by the Company, consisting
principally of a communicator which connects to the telephone line in the
subscriber's home and a personal help button, which is worn or carried by
the individual subscriber and which, when activated, initiates a telephone
call from the subscriber's communicator to the Company's central monitoring
facilities. The Company believes it is a major provider of these services
since it monitors approximately 278,000 subscribers as of December 31, 1999
and estimates it serves, along with community hospitals, more than 375,000
subscribers in a North American personal emergency response services market
estimated by the Company to be between 500,000 and 600,000 subscribers as
of December 31, 1999.
Business Developments
As previously announced, on September 2, 1999 Protection One, Inc.
("Protection One") and the Company entered into a mutual agreement to
terminate their proposed merger originally announced in October 1998. The
companies also announced the agreement to terminate the related stock
option granted to Protection One by the Company in connection with the
proposed merger. The total costs related to the proposed merger were
approximately $1.4 million of which Protection One reimbursed the Company
$1.0 million. The Company recorded a pre-tax non-recurring charge of
$423,000 in the third quarter of 1999 for the unreimbursed costs. At
December 31, 1999 approximately $134,000 of this charge remained in accrued
restructuring and other non-recurring charges.
During the third quarter of 1999, the Company completed the
outsourcing of the manufacturing of its personal response equipment to the
Ademco Group, a division of Honeywell International, Inc. Ademco is an
international manufacturer of electronic equipment. It is the largest
contract manufacturer of equipment to the security industry and performs
contract manufacturing for a large number of companies in related
industries. The decision to outsource represents a change in the Company's
manufacturing strategy, as it no longer supports a manufacturing site. All
repair and distribution of the Company's hardware, however, is expected to
continue from its corporate headquarters. The Company anticipates that this
strategic decision will result in technological innovation and significant
future cost savings opportunities.
During 1999, the Company moved its corporate headquarters and U.S.
based monitoring operations to a new 84,000 square foot facility in
Framingham, Massachusetts. Annual base rental payments under the lease
approximate $814,000. The Company has two five-year renewal options
contained within the lease.
In February 1999, the Company negotiated a buyout of its old corporate
headquarters facility lease. Pursuant to the arrangement, payments were to
be made to the Company during 1999 dependent on space becoming available in
the old facility. The Company received a payment of approximately $0.5
million during the first quarter of 1999, net of applicable negotiation
fees, and recorded this payment as other income. During the third quarter
of
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1999, the Company received a final payment of approximately $0.3 million,
net of applicable negotiation fees and also recorded this payment as other
income.
In August 1999 the Company completed the acquisition of TelCARE
Systems, Inc. of Denver, Colorado. TelCARE provides personal response
services. The purchase price was approximately $943,000 which was financed
by borrowing $0.9 million on a pre-existing line of credit. The acquisition
was accounted for as a purchase transaction and, as a result, the Company
recorded goodwill of approximately $913,000 to be amortized over an
estimated life of five years. The results of the acquired business are
included in the Company's consolidated financial statements from the date
of acquisition and did not have a material impact on 1999 operating
results.
Industry Segments
The Company operates in one industry segment. Its operations consist
of providing personal response services associated with those products it
designs and markets. Foreign revenues, from Canada, comprised less than 10%
of the Company's total revenues in 1999, and the Company has no significant
tangible assets in foreign countries.
The Lifeline Service
The Company's principal offering, called LIFELINE(R), consists of a
monitoring service utilizing equipment designed and marketed by the
Company. The Company's monitoring service is a personal response service
which provides 24-hour monitoring and personalized support to elderly
individuals with medical or age-related conditions and to physically
challenged individuals throughout the United States and Canada. Through use
of the LIFELINE service, individuals in need of help are able to signal
monitoring personnel in one of the Company's response centers. These
trained monitors identify the nature and extent of the subscriber's
particular need and manage the situation by notifying the subscriber's
friends, neighbors, and/or emergency personnel, as set forth in a
predetermined protocol established by the subscriber. The Company also
offers a version of its home monitoring service that provides social
support for elderly individuals who live alone. This service allows trained
monitoring personnel to often be in daily contact with these elders which
can be an important social connection for these subscribers.
The equipment used for the LIFELINE service includes a communicator,
which connects to the telephone line in the subscriber's home and a
personal help button, which is worn or carried by the individual
subscriber. When pressed, the personal help button sends a radio signal to
the communicator; the communicator automatically dials a response center
where monitoring personnel answer the call and dispatch the designated
responders, typically a friend or relative of the subscriber and/or
emergency service, when help is needed. Most of the time, however,
subscribers' calls require reassurance and support as a result of isolation
or loneliness.
The Company's primary monitoring center in Framingham, Massachusetts
is supported by its new proprietary CareSystem call center platform. The
Company completed the transition of its subscribers to its new CareSystem
call center platform in the third quarter of 1999. This call center
platform is a specially designed computer and telecommunications hardware
and software system used to identify, track and respond to subscriber
calls. CareSystem receives incoming signals from subscribers'
communicators, matches and retrieves the appropriate subscriber data
records from a central database, and routes both the call and the data
record to monitoring personnel in the Lifeline Response Center.
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In the past, the Company offered its customers, typically healthcare
providers which established their own Lifeline programs, two alternatives
for providing the LIFELINE monitoring service: they could utilize the
Lifeline Response Center to perform their monitoring or they could perform
their own monitoring locally using equipment and software manufactured by
the Company. Although the Company continues to service equipment for
customers who perform their own monitoring, the Company no longer markets
the equipment necessary for new providers to monitor their own subscribers.
New providers outsource their monitoring activities to a Lifeline
monitoring center to service their subscribers.
Lifeline also provides its local programs with a comprehensive set of
monitoring and business support services, which reduces the program
management responsibilities and administrative burden associated with a
local monitoring center. In addition, the Company provides the LIFELINE
service directly to subscribers in the United States and to subscribers in
Canada who do not have access to a local Lifeline program.
The Company offers several versions of its communicators. All models
currently available provide two-way voice communication over a speaker
between the subscriber and the response center as well as other features.
All of the Company's current models also offer the RSVP(TM) feature, which
allows the subscriber to answer routine telephone calls by pushing the
personal help button. The Company believes that the product line offers
customers flexibility in terms of price and functionality.
Customers
The Company primarily markets its services and products to hospitals
and other service providers in a variety of healthcare related fields.
Hospitals, however, have historically been the Company's primary market.
The Company believes that hospitals offer Lifeline's services and products
to capture revenues from the sale of the service, improve healthcare for
the communities they serve, enhance community relations, market other
hospital services to the subscriber base, and/or contain healthcare costs
by facilitating early discharge from the hospital and reducing the need for
nursing home care.
Sales and Marketing
The Company sells its services and products through its sales
organization in the United States and Canada.
In support of the sales effort, the Company's sales professionals
assist the Company's service providers in developing a marketing plan for
the Lifeline program, monitoring progress against that plan, and providing
training to the provider's staff on the management of their local Lifeline
program. Programs' marketing plans typically address the introduction of
Lifeline's services to the service provider's key decision makers; the
planning and delivery of presentations to community responders such as
police, fire, and medical emergency professionals; and the development of
local referral networks of elder care and other service organizations to
position the LIFELINE service as part of a continued care plan. Lifeline
personnel also provide continuing operational support, ongoing
consultation, and program evaluations.
Source of Raw Materials
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The Company has historically manufactured all of its products, relying
on outside vendors for components and enclosures. During the third quarter
of 1999, the Company completed the outsourcing of the manufacturing of its
personal response equipment to the Ademco Group, a division of Honeywell
International, Inc.. Ademco is an international manufacturer of electronic
equipment. This decision represents a change in the Company's manufacturing
strategy, as it no longer supports a manufacturing site. All repair and
distribution of the Company's hardware, however, is expected to continue
from its corporate headquarters. The Company anticipates that this
strategic decision will result in technological innovation and significant
future cost savings opportunities. However, there can be no assurance that
the Company will realize the intended cost savings it anticipates, or that
Ademco will not incur delays in manufacturing products for the Company as a
result of process difficulties, component shortages or for other reasons.
Any such delay could have a material adverse effect on the Company's
business, financial condition, or results of operations.
Patents, Licenses and Trademarks
The Company considers its proprietary know-how with respect to the
development and marketing of its personal response services to be a
valuable asset. Due to rapid technological changes that characterize the
industry, the Company believes that continued development of new services
and products, the improvement of existing services and products, and patent
and license protection are important in maintaining a competitive
advantage.
Although the Company owns numerous patents and patent applications in
the United States, Canada, and other countries, the Company does not
believe that its business as a whole is or will be materially dependent
upon the protection afforded by its patents.
The Company's LIFELINE trademark and servicemark are registered at the
United States Patent and Trademark Office and in most states and some
foreign countries. The Company also has a number of other trademarks.
Research and Development
Research and development continues to be an essential strategic
element for the Company and is geared towards enhancing and augmenting the
Company's products and services. Research and development expenses were
$1,565,000, $1,470,000, and $1,709,000 for the years ended December 31,
1999, 1998, and 1997, respectively.
Backlog/Seasonality
Because of the nature of the Company's products, it endeavors to
minimize the time that elapses from the receipt of a purchase order to the
date of delivery of the products. Accordingly, the Company's backlog as of
the end of any period represents only a portion of the Company's expected
sales for the succeeding period and is not significant in understanding the
Company's business. The Company does not believe that the industry in which
it operates is seasonal.
Government Regulation
The Company's products are registered with the Federal Communication
Commission ("FCC") and comply with FCC regulations pertaining to radio
frequency devices (Part 15) connected to the telephone system (Part 68).
The Company has also received registrations of equipment from
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Canadian agencies. As new models are developed, they are submitted to
appropriate agencies as required.
The Company has registered its communicator products with the United
States Food and Drug Administration.
None of the Company's business is subject to re-negotiation of profits
or termination of contract by the government, nor is it impacted by any
existing environmental laws.
Competition
The Company believes that it is a major provider of personal response
services and products since it monitors approximately 278,000 subscribers
as of December 31, 1999 and estimates it serves, along with community
hospitals, more than 375,000 subscribers in a North American personal
emergency response services market estimated by the Company to serve
between 500,000 and 600,000 subscribers as of December 31, 1999. Other
companies offer services and products competitive with those offered by the
Company. These companies offer personal response services on a regional or
national basis through both healthcare providers and directly to the
subscribers themselves.
Although price is a competitive factor, the Company believes that its
customers' main considerations in choosing a personal response service are
the high quality of service and product performance and reliability;
customer support and service; and reputation and experience in the
industry. The Company believes it competes favorably with respect to these
factors.
Employees
As of February 29, 2000 the Company employed approximately 635
full-time and 48 permanent part-time employees. None of the Company's
employees is represented by a collective bargaining unit, and the Company
believes its relations with its employees are good.
ITEM 2. Properties
The Company is party to a fifteen-year lease for an 84,000 square foot
facility in Framingham, Massachusetts for its corporate headquarters,
including its U.S. based monitoring operations. The Company began occupying
this new facility in February 1999.
Annual base rental payments under the lease approximate $814,000. The
Company has two five-year renewal options contained within the lease.
The Company also leases facilities in other locations to support its
field and Canadian operations.
In February 1999, the Company negotiated a buyout of its old corporate
headquarters facility lease. Pursuant to the arrangement, payments were
made to the Company during 1999 dependent on space becoming available in
the old facility. The Company received a payment of approximately $0.5
million during the first quarter of 1999, net of applicable negotiation
fees, and recorded this payment as other income. During the third quarter
of 1999, the Company received a final payment of approximately $0.3
million, net of applicable negotiation fees and also recorded this payment
as other income.
ITEM 3. Legal Proceedings
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The Company is not party to any material litigation.
ITEM 4. Submission of Matters to a Vote of Security Holders
None
Executive Officers of the Registrant
The following table sets forth certain information regarding the executive
officers of the Company as of December 31, 1999:
<TABLE>
<CAPTION>
Name Position Age
---- -------- ---
<S> <C> <C>
L. Dennis Shapiro Chairman of the Board 66
Ronald Feinstein President, Chief Executive Officer
and Director 53
Dennis M. Hurley Vice President, Finance,
Chief Financial Officer, Treasurer 53
Heather E. Edelman Vice President, Human Resources 52
Thomas E. Loper Vice President, Customer Care 50
Richard M. Reich Vice President and Chief Information Officer 53
Donald G. Strange Vice President, Sales and Marketing 53
Jeffrey A. Stein Clerk 41
</TABLE>
L. Dennis Shapiro, Chairman of the Board, has served the Company in this
capacity since 1978, and at various times, has served as President and Chief
Financial Officer.
Ronald Feinstein became an employee of the Company in September 1992 and
became Executive Vice President and Chief Operating Officer in October 1992. He
was appointed President and Chief Executive Officer in January 1993. Mr.
Feinstein has served as a director of the Company since 1985.
Dennis M. Hurley joined the Company in March 1995 as Vice President,
Finance; Chief Financial Officer; and Treasurer. From November 1994 to February
1995, Mr. Hurley was Corporate Controller for C.P. Clare Corp., which is an
electronics manufacturer. From 1977 to 1994, Mr. Hurley held various senior
financial management positions with Avery Dennison, most recently as Group
Controller for the Office Products Group.
Heather E. Edelman joined the Company in June 1993 as Vice President, Human
Resources. From 1989 through 1992, Ms. Edelman was Manager, Human Resources
Programs for ROLM, which manufactures, markets and services telecommunications
products and services.
Thomas E. Loper serves as Vice President, Customer Care. He joined the
Company in September 1995 as Vice President, Subscriber Services. From 1993
until 1995, Mr. Loper served as Area Vice President for Herman Miller,
manufacturer of office furniture.
Richard M. Reich became Vice President, Chief Information Officer in
September 1999. He had been Vice President, Technology and Advanced Services
since August 1994. From June 1990 to August 1994, Mr. Reich had served as Vice
President, Product Planning and Development. Since joining the Company in April,
1986 he had held the position of Vice President, Engineering.
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Donald G. Strange is Vice President, Sales and Marketing. He joined the
Company in February 1993 as Vice President, Sales. From September 1992 to
January 1993, Mr. Strange was Senior Vice President and General Manager of
American Distribution System, which manages the distribution of prescription
drugs and controlled substances. From 1969 to 1992, he was employed by
Hoffman-La Roche, Inc., where he held various management positions in sales and
marketing, most recently as National Director of Sales for its Roche Home
Healthcare Services division.
Jeffrey A. Stein has been the Clerk of the Company since February 2000 when
he replaced Norman B. Asher who had been Clerk of the Company since July 1978.
Mr. Stein has been a partner of the law firm of Hale and Dorr LLP since 1994,
which has been general counsel to the Company since 1976.
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Quarterly Market Information and Related Matters
The Company's common stock is traded on the Nasdaq Stock Market under the symbol
"LIFE." On February 29, 2000, the Company had 401 registered shareholders. The
table below reflects the high and low sales prices for 1999 and 1998.
<TABLE>
<CAPTION>
High Low
<S> <C> <C> <C>
1998 First Quarter $ 25.38 $ 21.00
Second Quarter 22.50 16.75
Third Quarter 21.88 17.75
Fourth Quarter 28.25 16.50
1999 First Quarter $ 27.81 $ 22.50
Second Quarter 22.50 17.50
Third Quarter 20.00 13.75
Fourth Quarter 15.63 12.88
</TABLE>
During the periods presented, the Company has not paid or declared any cash
dividends on its common stock. While the payment of dividends is within the
discretion of the Company's Board of Directors, the Company presently expects to
retain all of its earnings for use in financing the future growth of the
Company.
The Company from time to time issues shares to its employees as part of its
bonus program. In 1999, a total of 1,000 shares were issued under this program.
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ITEM 6. Selected Financial Data
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
(In thousands, except per share data) 1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Total revenues $70,337 $64,410 $56,964 $50,223 $43,379
Income from operations 3,190 9,513 3,327 6,295 4,765
Income before income taxes 4,176 9,976 3,921 7,078 5,505
Net income 2,506 5,986 2,298 4,176 3,148
Net income per share, diluted $ 0.40 $ 0.95 $ 0.37 $ 0.67 $ 0.51
Diluted weighted average
shares outstanding 6,299 6,309 6,232 6,197 6,115
</TABLE>
FINANCIAL POSITION (1)
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Working capital $10,069 $13,026 $12,320 $14,003 $15,253
Total assets 57,385 52,504 42,269 37,909 31,961
Long-term obligations(2) 3,354 11 16 25 32
Stockholders' equity 39,739 36,921 29,717 27,620 24,289
</TABLE>
(1) There were no cash dividends paid or declared during any of the periods
presented.
(2) Excludes current portion of Long-term obligations.
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ITEM 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
This and other reports, proxy statements, and other communications to
stockholders, as well as oral statements by the Company's officers or its
agents, may contain forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended, with respect to, among other
things, the Company's future revenues, operating income, or earnings per share.
Without limiting the foregoing, the words "believes," "anticipates," "plans,"
"expects," and similar expressions are intended to identify forward-looking
statements. There are a number of factors of which the Company is aware that may
cause the Company's actual results to vary materially from those forecast or
projected in any such forward-looking statement. These factors include, without
limitation, those set forth below under the caption "Certain Factors That May
Affect Future Results." The Company's failure to successfully address any of
these factors could have a material adverse effect on the Company's future
results of operations.
RESULTS OF OPERATIONS
1999 Compared with 1998
Total revenues for the year ended December 31, 1999 were $70.3 million, an
increase of 9% compared with the $64.4 million recorded in 1998.
Service revenues grew 21% to $47.0 million for the year ended December 31, 1999
and comprised 67% of the Company's total 1999 revenues, compared to 61% in 1998.
The Company's growth in its service business segment has continued because of
its strategy of packaging products and services into a single service offering,
which results in higher per-subscriber service revenue. Accordingly, there was a
21% growth in the number of subscribers the Company monitors to approximately
278,000 at December 31, 1999 from approximately 229,000 at December 31, 1998.
The Company's ability to sustain the current level of service revenue growth
depends on its ability to expand the market for its personal response services,
convert community hospital programs to service provided by the Company and
increase its focus on referral development and innovative partner relationships
in new channels of distribution. The Company believes that the high quality of
its services and its commitment to providing caring and rapid response to the
at-risk elderly and the physically challenged will be factors in meeting this
challenge.
Net product revenues decreased 9% to $21.8 million during 1999, from net product
revenues in 1998 of $24.0 million. During 1999, product sales declined as a
result of the Company's strategy of combining service and hardware offerings to
support its service business segment. As a result, the Company expects continued
declining product sales in future periods as it continues packaging products and
services into a single service offering.
Finance and rental income, representing income earned from the Company's
portfolio of sales-type leases, increased 10% to $1.5 million for the year ended
December 31, 1999 as compared to the $1.4 million recorded in the previous year.
While the Company's leasing portfolio continues to grow for its internally
managed and funded leasing program, this growth has slowed in 1999 as a result
of the Company's focus on its service business segment. The Company expects
finance income to decline in future periods because finance income is directly
related to its product business.
Total recurring revenues, consisting of service revenues and finance income, was
$48.5 million for the year ended December 31, 1999, an increase of nearly 20% as
compared to $40.4 million for the year
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ended December 31, 1998. The increase in recurring revenue reflects the
continued expansion of the Company's service business segment with its focus on
expanding the Company's recurring revenue base.
Cost of services, as a percentage of service revenues, increased to 62% for the
year ended December 31, 1999 from 57% for the year ended December 31, 1998. The
Company completed the transition of its subscribers to its new CareSystem call
center platform in the third quarter of 1999. The conversion to this new
platform took longer than originally planned and resulted in higher costs during
the transition period due to extra staffing needed in the Company's response
centers and the costs of operating duplicate facilities. Cost of services also
included additional costs of employee retention, continued investments in
personnel and recruiting initiatives due to the tight labor market. These
initiatives were principally associated with the delay in the implementation of
the CareSystem platform and relocation of the Company's monitoring facility as
part of its 1999 move to new corporate headquarters in Framingham,
Massachusetts. Higher costs were also incurred during the first three quarters
of 1999 from systems enhancements and support to maintain the Company's former
monitoring service infrastructure while it finalized the implementation of its
CareSystem call center platform. The depreciation of the capital expenditures
for the CareSystem call center platform has also impacted current results of
operations. In addition, the Company incurred a full year of customer service
costs associated with AlertCall, Inc. of Amherst, New York which was purchased
by the Company in November 1998.
For the year ended December 31, 1999, cost of product sales as a percentage of
product sales was 29%, versus 27% in the prior year. The Company completed the
transition of outsourcing its manufacturing operations to Ademco during the
third quarter of 1999. While the Company continues to strive to maintain its
cost of sales at a consistent percentage of net product sales, there were
additional costs incurred during 1999 associated with the outsourcing of the
manufacturing function. These additional costs, including higher temporary help,
were offset, in part, by a reduction in material costs and the efficiencies
created during the first half of 1999 by higher than expected production in
anticipation of the outsourcing to Ademco. The Company believes that the
decision to outsource to Ademco will result in technological innovation and
future cost savings opportunities.
Selling, general, and administrative expenses as a percentage of total revenues
improved to 39% for the year ended December 31, 1999 compared to 40% for the
year ended December 31, 1998. While the Company has been able to successfully
control many of its costs included within selling, general and administrative
expenses, the Company did incur some higher costs during 1999. Specifically, the
Company incurred higher costs for its increased recruiting initiatives for its
growing employee base and for its 1999 customer conference which it did not have
in 1998. The Company also incurred moving costs in connection with its
relocation to new corporate headquarters. These higher costs were offset, in
part, by savings it has experienced in operating costs of its new corporate
headquarters as well as lower expenditures in the areas of market and product
development and promotional strategies aimed at the healthcare channel. In
addition, 1998 was also impacted by compensation expense that was incurred for
certain stock options that became exercisable during 1998. No compensation
expense was recorded in 1999 for these stock options.
Research and development expenses represented 2% of revenues in 1999 and 1998.
Research and development efforts are focused on ongoing product improvements and
developments. The Company expects to maintain these expenses, as a percentage of
total revenues, at a relatively consistent level.
As discussed in more detail in Note J to the financial statements, in December
1997, the Company approved a restructuring plan to improve operating
efficiencies and reduce costs, and recorded a restructuring charge of $4.3
million on a pre-tax basis. During 1998, certain events occurred which resulted
in the reversal of approximately $200,000 of the original severance reserve,
$655,000 for the
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reversal of the original reserve for its old lease commitment and the reversal
of $155,000 of the original reserve for the net book value of abandoned assets.
In June 1999, the Company recorded a pre-tax restructuring charge of
approximately $2.2 million as a result of the outsourcing of the Company's
equipment manufacturing operations to Ademco and a change to the Company's
original estimates for the cost of its corporate headquarters' relocation.
On September 2, 1999, the Company and Protection One mutually agreed to
terminate their proposed merger and therefore the Company recorded a pre-tax
charge of $423,000 for unreimbursed costs incurred in connection with the
proposed merger.
The Company's effective tax rate was 40.0% for 1999 and 1998.
1998 Compared with 1997
Total revenues for the year ended December 31, 1998 were $64.4 million, an
increase of 13% compared with the $57.0 million recorded in 1997.
Service revenues grew 22% to $39.0 million for the year ended December 31, 1998
and comprised 61% of the Company's total 1998 revenues, up from 56% in 1997.
This increase in service revenue reflected the continued success of the
Company's strategy to focus on subscriber growth and recurring service revenues.
Accordingly, there was a 17% growth in the number of subscribers the Company
monitored to approximately 229,000 at December 31, 1998 from approximately
196,000 at December 31, 1997. The increase in service revenues continued to be
favorably impacted by the Company's strategy of packaging products and services
into a single service offering, which resulted in higher per-subscriber service
revenue.
Net product revenues totaled $24.0 million during 1998, which represented a 1%
increase over net product revenues in 1997 of $23.8 million. During 1998, the
Company was able to maintain its product sales while it continued with its
strategy of providing the hardware as part of the monthly service fee to support
the transition to a service oriented business.
Finance and rental income earned from the Company's portfolio of sales-type
leases, increased 20% to $1.4 million for the year ended December 31, 1998 as
compared to the $1.2 million recorded in 1997. The increase was the result of
the continued growth and success of the Company's internally managed and funded
leasing program.
Cost of services, as a percentage of service revenues, increased to 57% for the
year ended December 31, 1998 from 56% for the year ended December 31, 1997. Cost
of services was high due to continued investments in personnel and additional
costs of employee retention and recruiting initiatives. These initiatives were
associated with the upcoming 1999 relocation of the Company's monitoring
facility as part of the move of the Company's headquarters to Framingham,
Massachusetts. The Company also incurred higher costs associated with continued
systems enhancements and support to maintain its old service infrastructure
pending the implementation of its CareSystem call center platform. The
expenditures for the Company's new CareSystem call center platform did not have
an impact on 1998 results of operations since the platform was placed in service
in 1999.
For the year ended December 31, 1998, cost of product sales as a percentage of
product sales was 27%, versus 28% in the prior year. The improvement was largely
due to reductions in material costs from volume pricing discounts.
-12-
<PAGE>
Selling, general, and administrative expenses as a percentage of total revenues
improved to 40% for the year ended December 31, 1998 from 41% for the year ended
December 31, 1997. The improvement in selling, general, and administrative
expenses was mainly due to the Company effectively reducing such costs as a
percentage of total revenues in 1998. There was also a significant decrease in
amortization expense because of the impairment of goodwill accounted for in the
restructuring charge taken in the fourth quarter of 1997. The actual $2.5
million dollar increase to $25.7 million at December 31, 1998 from $23.2 million
at December 31, 1997 was attributable to a variety of factors including
increased spending associated with recruiting and hiring of employees as a
result of the growth of the Company, higher operating costs for the Company's
former corporate headquarters and increased sales and management bonuses
relating to the improved 1998 performance. In 1998, the Company also met
financial goals that caused certain stock options to vest. The Company therefore
was required to record approximately $603,000 of compensation expense associated
with these options.
Research and development expenses represented 2% of revenues in 1998 versus 3%
in 1997. Research and development efforts are focused on ongoing product
improvements, and the Company expects to maintain these expenses, as a
percentage of total revenues, at a relatively consistent level.
The Company's effective tax rate was 40.0% for 1998, as compared to 41.4% in
1997. The decrease in the Company's rate was largely attributable to the
decrease in Canadian earnings, lower amortization of non-deductible goodwill in
Canada and lower state income taxes as a result of a favorable change in state
apportionment rules in Massachusetts.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1999, the Company's portfolio of cash, cash
equivalents, and investments decreased $8.0 million to $1.4 million at December
31, 1999 from $9.4 million at December 31, 1998. The decrease was attributable
to a variety of factors. The Company purchased approximately $9.2 million of
property and equipment during 1999. Expenditures of nearly $2.5 million were
associated with the continued development of the Company's new CareSystem
response center platform at its primary monitoring facility and approximately
$3.1 million was for Company-owned equipment provided directly to customers
under comprehensive service agreements and to subscribers not serviced by local
Lifeline programs. The Company also spent an additional $3.4 million for its new
corporate facility including purchases and the build out of a heating,
ventilation and air conditioning system, a computer room, a computer network
infrastructure, furniture, leasehold improvements, a telephone and voicemail
system.
During 1999, the Company paid approximately $4.4 million to local community
hospitals for conversions to services provided by the Company and paid
approximately $943,000 for the acquisition of TelCare Systems, Inc. of Denver,
Colorado. Tax payments of nearly $2.1 million, the build-up of inventory during
1999 pending the outsourcing of the Company's manufacturing operations to
Ademco, and the increase of the Company's accounts receivable aging also
contributed to the decrease. Profitable operations of $9.1 million, a $1.0
million reimbursement from Protection One for merger related costs and a $2.0
million borrowing under the Company's line of credit helped to offset the
effects of the expenditures for 1999 as well as utilization of the Company's
capital lease line.
The Company completed the transition of its United States monitored subscribers
to its new CareSystem platform in September 1999. The Company has invested
nearly $12.7 million through December 31, 1999 and anticipates it will spend an
additional $2.0 million for capacity upgrade and enhancements in 2000.
-13-
<PAGE>
In June 1999, the Company entered into an amended and restated $10.0 million
line of credit which was originally obtained in April 1998. The agreement has
two components, the first being a working capital line of credit, the other, the
ability to convert up to five million dollars into a five year fixed loan. The
working line of credit's interest rate is based on the London Interbank Offered
Rate (LIBOR), while the fixed loan is at the bank's prime interest rate. The
agreement contains several covenants, including the Company maintaining certain
levels of financial performance and capital structure. These financial covenants
include a requirement for a current ratio of at least 1.5 to 1.0 and a leverage
ratio of no more than 1.25 to 1.0 through the quarter ending March 31, 2000 and
1.0 to 1.0 thereafter. In addition, there are certain negative covenants that
include limitations on the Company's capital and other expenditures,
restrictions on the Company's capacity to obtain additional debt financing,
restrictions on the disposition of the Company's assets, and restrictions on its
investment portfolio. The Company was not in compliance with certain covenants
during certain quarters of 1999. The Company obtained waivers from its bank for
these covenants. This line of credit matures on June 30, 2002, and as of
December 31, 1999 the Company had borrowed $2.0 million under this line.
The Company is party to a Master Lease Agreement for up to $2.5 million for
furniture, computers, security systems and other related equipment purchased in
connection with the Company's move to its new corporate facility and for other
purchases. As of December 31, 1999 the Company had made purchases of
approximately $2.3 million under these agreements.
The Company is party to a fifteen-year lease for an 84,000 square foot facility
in Framingham, Massachusetts for its corporate headquarters. Annual base rental
payments under the lease approximate $814,000. At the Company's option the lease
contains two five-year renewal options. The Company incurred expenditures of
nearly $7.0 million through December 31, 1999 for capital improvements
associated with its new corporate facility, including purchases for the
development of a computer center for its new monitoring platform, its corporate
infrastructure and additional capacity to handle future subscriber growth.
Purchases of furniture, fixtures and leasehold improvements were also included
in the aforementioned total capital expenditures amount. The Company utilized
approximately $2.3 million of the above mentioned Master Lease Agreement
related to capital improvements in the new facility . The Company expects to
spend an additional $0.2 million in 2000 for similar items of which some will be
incorporated as part of the Master Lease Agreement.
The Company expects that funding requirements for operations and in support of
future growth are expected to be met primarily from operating cash flow,
existing cash and marketable securities and its $10.0 million line of credit.
The Company expects these sources will be sufficient to finance the cash needs
of the Company through the next twelve months. This includes the continued
investment in its new response center platform, the remaining expenditures
needed for its new corporate headquarters, the requirements of its internally
funded lease financing program, any potential acquisitions and other investments
in support of its current business.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following important factors, among others, could cause actual results to
differ materially from those indicated by forward-looking statements made in
this Annual Report on Form 10-K and presented elsewhere by management from time
to time.
During the third quarter of 1999, the Company completed the outsourcing of the
manufacturing of its personal response equipment to the Ademco Group, a division
of Honeywell International, Inc. This decision represents a change in the
Company's manufacturing strategy, as it will no longer support a
-14-
<PAGE>
manufacturing site at its corporate location. There can be no assurance that the
Company will realize the intended cost savings it anticipates, or that it will
not experience delays in obtaining products from Ademco as a result of process
difficulties, component shortages or for other reasons. Any such delay could
have a material adverse effect on the Company's business, financial condition,
or results of operations.
The Company's results are partially dependent on its ability to develop services
and products that keep pace with continuing technological changes, evolving
industry standards, changing subscriber preferences and new service and product
introductions by the Company's competitors. Lifeline's future success will
depend on its ability to enhance its existing services and products (including
accessories), to introduce new service and product offerings to meet and adapt
to changing customer requirements and emerging technologies on a timely basis
and to offer such products and services at competitive prices. There can be no
assurance that Lifeline will be successful in identifying, developing,
manufacturing or marketing new services and products or enhancing its existing
services and products on a timely basis or that Lifeline will be able to offer
such services and products at competitive prices. Also, there can be no
assurance that services, products or technologies developed by others will not
render Lifeline's services or products noncompetitive or obsolete. The Company
will depend on Ademco to provide it with prototypes and otherwise assist in the
product development process. There can be no assurance that the Company will not
experience delays in receiving such assistance.
The Company completed the transition of its United States subscribers to its new
CareSystem call center platform during 1999 and experienced certain software
design deficiencies which it has resolved in connection with the transition. The
Company may continue to experience problems associated with this new information
technology. There can be no assurance that the Company will realize the intended
benefits from the new system.
The Company's growth is dependent on its ability to increase the number of
subscribers served by its monitoring centers. The Company's ability to continue
to increase service revenue is a key factor in its long-term growth, and there
can be no assurance that the Company will be able to do so. The Company's
failure to increase service revenue could have a material adverse effect on the
Company's business, financial condition, or results of operations.
The Company's equipment revenue has been declining as a result of its strategy
of combining service and hardware offerings to support the transition to a
service oriented business. As the Company continues growing its service business
segment to increase its recurring revenue, there can be no assurance that
service revenue will increase at a rate sufficient to offset the expected
decrease in higher margin equipment revenue both on a quarterly and annual
basis.
The Company may expand its operations through the acquisition of additional
businesses. There can be no assurance that the Company will be able to identify,
acquire or profitably manage additional businesses or successfully integrate any
acquired businesses into the Company without substantial expenses, delays or
other operational or financial problems. In addition, acquisitions may involve a
number of special risks, including diversion of management's attention, failure
to retain key acquired personnel, unanticipated events, contingent liabilities
and amortization of acquired intangible assets. There can be no assurance that
the acquired businesses, if any, will achieve anticipated revenues or earnings.
In addition, the reduction in the Company's cash and cash equivalent balances
may adversely affect the Company's ability to pay for acquisitions.
The Company's equipment sales are ordinarily made to healthcare providers that
establish their own Lifeline programs. These healthcare providers typically
rent, rather than sell, the Lifeline products to
-15-
<PAGE>
subscribers and accordingly following such time as a product is no longer used
by a subscriber, it is returned to the healthcare provider and becomes available
for rent to another subscriber. As a result of this use and reuse of the
Company's products, sales of such products are dependent on growth in the number
of subscribers and on the ability of the Company to encourage its healthcare
provider customers to replace their existing inventory by continuing to enhance
its products with new features.
The Company's monitoring operations are concentrated principally in its
corporate headquarters facility. Although the Company believes that it has
constructed safeguards to protect against system failures, the disruption of
service at its monitoring facility, whether due to telephone or electrical
failures, earthquakes, fire, or other similar events or for any other reason,
could have a material adverse effect on the Company's business, financial
condition, or results of operations.
IMPACT OF THE YEAR 2000 ISSUE
During 1999 the Company completed a formal six-phase Year 2000 program to
determine the extent of its own Year 2000 exposures. The Awareness Phase was
ongoing and involved continuous communication, both internally and externally
with customers and vendors. The Assessment Phase identified the Company's
products, services and equipment that contain micro-controllers, as well as all
information technology hardware and software to identify two-digit year
exposures. The Planning Phase was the Company's decision-making phase, and it
prioritized the schedule of resolutions to be implemented. In the Resolution
Phase, the Company modified, replaced or retired systems where necessary. The
Testing Phase tested the Company's readiness to roll out its results. Finally
the Rollout Phase implemented the entire process into production.
As of March 30, 2000 the company has not experienced any disruptions related to
year 2000 issues.
Through December 31, 1999, the Company spent approximately $175,000 related to
Year 2000 issues, consisting principally of personnel costs incurred in the
scope of normal operations and consulting costs. This is expected to be the
total cost of the Year 2000 project.
Item 7a - Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
-16-
<PAGE>
ITEM 8. Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
Quarterly Results of Operations
(Unaudited) Quarter Ended
(Dollars in thousands, except per share data) Mar 31 Jun 30 Sep 30 Dec 31 Full Year
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
1999 Total revenues $ 16,226 $ 17,575 $ 18,128 $ 18,408 $ 70,337
Net income 1,461 335 432 278 2,506
Net income per share, diluted $ 0.23 $ 0.05 $ 0.07 $ 0.05 $ 0.40
1998 Total revenues $ 14,952 $ 16,017 $ 16,286 $ 17,155 $ 64,410
Net income 1,145 1,451 1,506 1,884 5,986
Net income per share, diluted $ 0.18 $ 0.23 $ 0.24 $ 0.30 $ 0.95
</TABLE>
-17-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Lifeline Systems, Inc.:
In our opinion, the accompanying consolidated financial statements listed in the
index appearing under Item 14(a)(1) on page 42 present fairly, in all material
respects, the consolidated financial position of Lifeline Systems, Inc. at
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States. In addition,
in our opinion, the financial statement schedule listed in the index appearing
under Item 14(a)(2) on page 42 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
financial statements. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
---------------------------------------
Boston, Massachusetts
February 7, 2000
(Except as to the 14th paragraph of Note E for which the date is March 30, 2000)
-18-
<PAGE>
LIFELINE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS 1999 1998
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,415 $ 2,702
Short-term investments -- 6,696
Accounts receivable, net of allowance for doubtful
accounts of $706 in 1999 and $239 in 1998 9,247 7,459
Inventories 2,605 1,496
Net investment in sales-type leases 2,310 1,713
Prepaid expenses and other current assets 832 1,503
Prepaid income taxes 1,013 136
Deferred income taxes 1,788 2,238
-------- --------
Total current assets 19,210 23,943
Property and equipment, net 26,852 20,776
Net investment in sales-type leases 5,747 5,892
Goodwill and other intangible assets, net 5,551 1,469
Other assets 25 424
-------- --------
Total assets $ 57,385 $ 52,504
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,801 $ 1,690
Accrued expenses 2,224 2,857
Accrued payroll and payroll taxes 2,133 2,695
Accrued income taxes 140 1,300
Deferred revenues 846 685
Current portion of capital lease obligation 478 10
Current portion of long term debt 405 --
Product warranty and other current liabilities 458 817
Accrued restructuring and other non-recurring charges 656 863
-------- --------
Total current liabilities 9,141 10,917
Deferred income taxes 4,592 3,548
Deferred compensation 559 1,578
Long term portion of capital lease obligation 1,779 11
Long term debt, net of current portion 1,575 --
Other non-current liabilities -- 159
-------- --------
Total liabilities 17,646 16,213
Commitments and contingencies
Stockholders' equity:
Common stock, $0.02 par value, 20,000,000 shares authorized,
6,563,657 shares issued in 1999 and 6,425,414 shares issued in 1998 131 129
Additional paid-in capital 18,626 16,945
Retained earnings 25,941 23,435
Less: Treasury stock at cost, 621,089 shares in 1999 and 592,548 shares in 1998 (4,556) (4,028)
Notes receivable - officers (400) (100)
Accumulated other comprehensive loss-cumulative translation adjustment (3) (90)
-------- --------
Total stockholders' equity 39,739 36,291
-------- --------
Total liabilities and stockholders' equity $ 57,385 $ 52,504
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-19-
<PAGE>
LIFELINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
For the years ended December 31, 1999, 1998 and 1997
(In thousands except for per share data)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues
Services $ 47,000 $ 38,991 $ 32,031
Net product sales 21,806 24,032 23,776
Finance and rental income 1,531 1,387 1,157
-------- -------- --------
Total revenues 70,337 64,410 56,964
-------- -------- --------
Costs and expenses
Cost of services 29,177 22,287 17,821
Cost of sales 6,305 6,533 6,582
Selling, general, and administrative 27,477 25,617 23,215
Research and development 1,565 1,470 1,709
Restructuring and other non-recurring charges 2,623 (1,010) 4,310
-------- -------- --------
Total costs and expenses 67,147 54,897 53,637
-------- -------- --------
Income from operations 3,190 9,513 3,327
-------- -------- --------
Other income (expense)
Interest income 219 591 642
Interest expense (129) (47) (20)
Other income (loss) 896 (81) (28)
-------- -------- --------
Total other income, net 986 463 594
-------- -------- --------
Income before income taxes 4,176 9,976 3,921
Provision for income taxes 1,670 3,990 1,623
-------- -------- --------
Net income 2,506 5,986 2,298
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments 53 (11) (43)
-------- -------- --------
Comprehensive income $ 2,559 $ 5,975 $ 2,255
======== ======== ========
Net income per weighted average share:
Basic $ 0.43 $ 1.03 $ 0.40
Diluted $ 0.40 $ 0.95 $ 0.37
Weighted average shares:
Basic 5,892 5,817 5,736
Diluted 6,299 6,309 6,232
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-20-
<PAGE>
LIFELINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1999, 1998 and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock
--------------------- Paid-In Retained ------------------
Shares Amount Capital Earnings Shares Amount
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 5,684,844 $124 $ 15,618 $15,151 532,348 $(2,923)
Exercise of stock options 143,546 4 490
Issuance of stock under employee stock purchase plan 15,012 220
Income tax benefit from stock options exercised 6
Purchase of treasury stock (60,700) 60,700 (1,107)
Issuance of treasury stock 500 6 (500) 2
Payment of note receivable by CEO
Cumulative translation adjustment
Net income 2,298
---------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 5,783,202 128 16,340 17,449 592,548 (4,028)
Exercise of stock options 37,364 1 386
Issuance of stock under employee stock purchase plan 12,300 219
Cumulative translation adjustment
Net income 5,986
---------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 5,832,866 $129 $16,945 $23,435 592,548 ($4,028)
Purchase of treasury stock (29,541) 29,541 (535)
Issuance of treasury stock 1,000 7 (1,000) 7
Exercise of stock options 138,243 2 1,674
Cumulative translation adjustment
Net income 2,506
---------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 5,942,568 $131 $18,626 $25,941 621,089 ($4,556)
===========================================================================
</TABLE>
<TABLE>
<CAPTION>
Notes Cumulative Total
Receivable Translation Stockholders'
Officers Adjustment Equity
--------------------------------------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ (350) $ 27,620
Exercise of stock options 494
Issuance of stock under employee stock purchase plan 220
Income tax benefit from stock options exercised 6
Purchase of treasury stock (1,107)
Issuance of treasury stock 8
Payment of note receivable by CEO 250 250
Cumulative translation adjustment ($72) (72)
Net income 2,298
--------------------------------------------
BALANCE, DECEMBER 31, 1997 (100) (72) 29,717
Exercise of stock options 387
Issuance of stock under employee stock purchase plan 219
Cumulative translation adjustment (18) (18)
Net income 5,986
--------------------------------------------
BALANCE, DECEMBER 31, 1998 ($100) ($90) $36,291
Purchase of treasury stock (535)
Issuance of treasury stock 14
Exercise of stock options (300) 1,376
Cumulative translation adjustment 87 87
Net income 2,506
--------------------------------------------
BALANCE, DECEMBER 31, 1999 ($400) ($3) $39,739
============================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-21-
<PAGE>
LIFELINE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,1999,1998, and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,506 $ 5,986 $ 2,298
Adjustments to reconcile net income to net cash provided
by operating activities:
Write off of fixed assets and intangibles 916 136 1,986
Non-cash portion of restructuring charge 380 (155) 2,813
Depreciation and amortization 5,712 4,221 3,919
Treasury stock issued for employee compensation 14 -- 8
Provision for bad debts 528 138 85
Deferred income tax provision (benefit) 1,494 1,383 (717)
Deferred compensation (1,019) 603 79
Changes in operating assets and liabilities:
Accounts receivable (2,231) (145) (1,440)
Inventories (1,109) (121) 75
Net investment in sales-type leases (452) (1,520) (1,647)
Prepaid expenses, other current assets and other assets 528 (698) 171
Accounts payable, accrued expenses and other liabilities (914) 1,331 97
Accrued payroll and payroll taxes (581) 957 15
Income taxes payable (1,152) 1,080 (625)
Accrued restructuring and other non-recurring charges (587) (1,306) (489)
-------- -------- --------
Net cash provided by operating activities 4,033 11,890 6,628
-------- -------- --------
Cash flows from investing activities:
Purchases of investments (3,145) (24,319) (7,500)
Sales and maturities of investments 9,841 23,473 11,968
Additions to property and equipment (9,162) (9,171) (11,886)
Business purchases and other (5,383) (1,581) --
-------- -------- --------
Net cash used in investing activities (7,849) (11,598) (7,418)
-------- -------- --------
Cash flows from financing activities:
Principal payments under long-term obligations (353) (226) (59)
Proceeds from issuance of long term debt 2,025 -- --
Proceeds from stock options exercised and
employee stock purchase plan 1,376 606 720
Repayment of loan from officer -- -- 250
Purchase of treasury stock (535) -- (1,107)
-------- -------- --------
Net cash provided by (used in) financing activities 2,513 380 (196)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (1,303) 672 (986)
-------- -------- --------
Effect of foreign exchange on cash 16 11 (25)
-------- -------- --------
Cash and cash equivalents at beginning of year 2,702 2,019 3,030
-------- -------- --------
Cash and cash equivalents at end of year $ 1,415 $ 2,702 $ 2,019
======== ======== ========
Non-cash activity
Issuance of note receivable for exercise of stock option $ 300 $ -- $ --
Capital leases 2,257 -- --
Issuance of treasury stock for compensation 14 -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-22-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Lifeline Systems, Inc. (the "Company") provides 24-hour personal response
monitoring services to its subscribers, primarily elderly individuals with
medical or age-related conditions as well as physically challenged individuals.
These subscribers communicate with the Company through products designed and
marketed by the Company, consisting principally of a communicator which connects
to the telephone line in the subscriber's home and a personal help button, which
is worn or carried by the individual subscriber and which, when activated,
initiates a telephone call from the subscriber's communicator to either the
Company's central monitoring facilities or to a local community hospital.
Principles of Consolidation
The consolidated financial statements include the accounts of Lifeline Systems,
Inc. and its wholly owned subsidiaries (the "Company"). All significant
intercompany balances and transactions have been eliminated.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Cash, Cash Equivalents, and Investments
The Company considers all securities purchased with a maturity of three months
or less at the date of acquisition to be cash equivalents. The Company's
investments are deemed to be available for sale. Short-term investments
consisted primarily of obligations of the US Government and its agencies,
tax-exempt securities, commercial paper, and bank time deposits. Investments are
carried at fair market value, which approximates cost.
-23-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cash, Cash Equivalents, and Investments (continued)
The fair market value of securities, which approximates cost, consists of the
following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Type of Security December 31,
----------------------------------------------------------------------
1999 1998
------ ------
<S> <C> <C>
US Government and Agency
securities $ -- $ 252
Tax-exempt securities -- 2,236
Corporate bonds and securities -- 4,208
--------------------
$ -- $6,696
----------------------------------------------------------------------
Cash and cash equivalents 1,415 2,702
----------------------------------------------------------------------
Total cash, cash equivalents and investments $1,415 $9,398
======================================================================
</TABLE>
-24-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventories
Inventories are stated at the lower of cost or market, as determined by the
first-in, first-out method.
Property and Equipment
Property and equipment are carried at cost. Depreciation and amortization are
computed principally by the straight-line method over the useful lives of the
assets, as follows:
<TABLE>
<S> <C>
Equipment 3 to 10 years
Furniture and fixtures 7 years
Equipment Leased to others 5 years
Equipment under capital leases 3 to 7 years
Leasehold Improvements 10 to 15 years
</TABLE>
When assets are sold or retired, the related cost and accumulated depreciation
are removed from the accounts and any resulting gain or loss is credited or
charged to income. Expenditures for maintenance and repairs are charged to
expense as incurred; betterments are capitalized.
Equipment Leased to Others
The Company rents its personal response products to subscribers who do not have
access to a local Lifeline program. The Company records the products as property
and equipment at cost, and depreciation is computed by the straight-line method
over an estimated useful life of five years.
Goodwill and Other Intangible Assets
Goodwill is recorded at cost and amortized on a straight-line basis over its
estimated useful life. During 1999, the Company paid approximately $4.4 million
to local community hospitals for conversion to services provided by the Company.
Intangible assets related to these service agreements consist of the cost of
purchasing the rights to service and/or manage the personal response systems
program located in various stand-alone facilities. These agreements allow the
Company to monitor and provide other related services to existing and future
subscribers over the term of the agreements. The Company amortizes the
acquisitions costs over the life of the agreements, which is typically five
years.
Impairment of long-lived assets
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
be Disposed Of," the Company evaluates the possible impairment of long-lived
assets, including goodwill and other intangible assets, whenever events or
circumstances indicate that the carrying value of the assets may not be
recoverable.
-25-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Product Warranty
The Company's products are generally under warranty against defects in material
and workmanship. The Company provides an accrual for estimated warranty costs at
the time of sale of the related products.
Revenue Recognition
Service revenues are associated primarily with providing monitoring and
maintenance of personal response products and are recognized ratably over the
contractual period. Revenues from the sale of personal response products are
recognized upon shipment. Finance income attributable to sales-type lease
contracts is initially recorded as unearned income and subsequently recognized
under the interest method over the term of the leases.
Foreign Currency Translation
The financial statements of the Company's subsidiary outside the United States
is generally measured using the local currency as the functional currency.
Assets and liabilities of this subsidiary are translated at the rates of
exchange at the balance sheet date. The resulting translation adjustments are
included in cumulative translation adjustment as a separate component of
stockholders' equity. Income and expense items are translated at average monthly
rates of exchange. Gains and losses from foreign currency transactions of this
subsidiary are included in net income.
Income Taxes
The Company accounts for income taxes under a liability approach. Under this
approach, deferred tax assets and liabilities are recognized based on temporary
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
temporary differences are expected to reverse.
Net Income Per Common Share
Net income per basic common share is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Net income per diluted common shares is computed based on the
weighted-average number of common and dilutive common equivalent shares
outstanding during each period. Common equivalent shares consist of stock
options calculated in accordance with SFAS No. 128, "Earnings per Share."
Industry Segments
The Company operates in one industry segment. Its operations consist of
providing personal response services associated with the monitoring of those
products it designs and markets. Foreign revenues, from Canada, comprise less
than 10% of the Company's total revenues, and the Company has no significant
tangible assets in foreign countries.
-26-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentration of
credit risk, include cash, cash equivalents, investments, and trade receivables.
The Company sells its products primarily to hospitals and other healthcare
institutions. The Company performs ongoing credit evaluations of its customers
and, in the case of sales-type leases the leased equipment serves as collateral
in the transactions. The Company has established guidelines relative to credit
ratings, diversification and maturities that maintain safety and liquidity. The
Company has not experienced any significant losses on these financial
instruments.
Reclassification
Certain prior year balances have been reclassified to conform to the current
year presentation.
B. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
(Dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Purchased parts and assemblies $ 100 $ 556
Work in progress 10 324
Finished goods 2,495 616
- --------------------------------------------------------------------------------
Total inventories $ 2,605 $ 1,496
================================================================================
</TABLE>
C. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
(Dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Equipment $ 21,442 $ 11,136
Furniture and fixtures 597 684
Equipment leased to others 12,935 9,834
Equipment under capital leases 3,170 1,035
Leasehold improvements 4,885 3,439
Capital in progress 786 10,943
-----------------------
43,815 37,071
Less: accumulated depreciation and amortization (16,963) (16,295)
- --------------------------------------------------------------------------------
Total property and equipment, net $ 26,852 $ 20,776
================================================================================
</TABLE>
-27-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
C. PROPERTY AND EQUIPMENT (continued)
Accumulated depreciation and amortization amounted to $7,920,000 and $5,996,000
on equipment leased to others and $826,000 and $1,023,000 on equipment under
capital leases at December 31, 1999 and 1998, respectively. In total,
depreciation expense amounted to $4,771,000, $4,111,000 and $3,377,000 for the
years ended December 31, 1999, 1998, and 1997, respectively.
D. LEASING ARRANGEMENTS
As Lessor
The Company maintains an internally financed and operated leasing program and
leases its personal response products to customers principally under sales-type
leases. As sales-type leases, the lease payments to be received over the term of
the leases are recorded as a receivable at the inception of the new lease.
Finance income attributable to the lease contracts is initially recorded as
unearned income and subsequently recognized as income under the interest method
over the term of the leases. The lease contracts are generally for five-year
terms, and the residual value of the leased equipment is considered to be
nominal at the end of the lease period.
The components of the net investment in sales-type leases are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
(Dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Minimum lease payments receivable $ 10,745 $ 10,492
Less: Unearned interest 2,541 2,697
Allowance for doubtful accounts 147 190
- -------------------------------------------------------------------------------
8,057 7,605
Less: Current portion 2,310 1,713
- -------------------------------------------------------------------------------
Net investment in sales-type leases $ 5,747 $ 5,892
================================================================================
</TABLE>
Future minimum lease payments due under non-cancellable sales-type leases at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
2000 3,470
2001 3,086
2002 2,267
2003 1,384
2004 528
Thereafter 10
- --------------------------------------------------------------------------------
Total future minimum lease payments $ 10,745
================================================================================
</TABLE>
As Lessee
In November 1997 the Company entered into a ten-year lease for a new corporate
facility in Framingham, Massachusetts which the Company occupied in 1999. In
November 1999 this
-28-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
D. LEASING ARRANGEMENTS (continued)
lease was extended to fifteen years. Annual rental payments under the lease
approximate $814,000. The lease includes scheduled base rent increases over the
term of the lease. The total amount of base rent payments is being charged to
expense on the straight-line method over the term of the lease. The Company has
recorded a deferred credit to reflect the excess of rent expense over cash
payments upon the commencement of the lease. In addition, the Company pays a
monthly allocation of the building's operating expenses and real estate taxes.
The Company has two renewal options of five years each contained within the
lease.
The Company also has several operating lease arrangements for sales offices and
office equipment that expire through 2003 and leases certain equipment under
capital leases which expire through 2006. Capital lease obligations are
collateralized by the related items. Capital leases total $2.3 million which are
comprised of $1,335,000 for furniture and $968,000 for equipment.
Future minimum lease payments under capital and operating leases with initial or
remaining terms of one year or more are as follows for the years ended December
31,:
<TABLE>
<CAPTION>
(Dollars in thousands) Capital Leases Operating Leases
----------------------------------
<S> <C> <C>
2000 $ 580 $ 1,060
2001 574 914
2002 485 854
2003 274 832
2004 274 920
Thereafter 365 9,043
- --------------------------------------------------------------------------------
Total minimum lease payments 2,552 $13,623
===================
Less amount representing interest 295
- -------------------------------------------------------------
Present value of net minimum lease payments 2,257
Less current portion 478
- -------------------------------------------------------------
Long-term obligation under capital leases $1,779
=============================================================
</TABLE>
Total rent expense under all operating leases was $1,318,000, $1,506,000 and
$1,485,000 for the years ended December 31, 1999, 1998, and 1997, respectively.
E. STOCKHOLDERS' EQUITY
Net Income Per Common Share
In accordance with SFAS No. 128, "Earnings per Share" the Company presents basic
and diluted EPS. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period.
-29-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
E. STOCKHOLDERS' EQUITY (Continued)
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity. A reconciliation of basic EPS to diluted EPS and dual
presentation on the face of the statement of income are also required.
Calculation of per share earnings is as follows:
(In thousands except per share figures)
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Basic:
Net income $2,506 $5,986 $2,298
Weighted average common shares outstanding 5,892 5,817 5,736
Net income per share, basic $ 0.43 $ 1.03 $ 0.40
====== ====== ======
Diluted:
Net income for calculating diluted earnings per share $2,506 $5,986 $2,298
Weighted average common shares outstanding 5,892 5,817 5,736
Common stock equivalents 407 492 496
------ ------ ------
Total weighted average shares 6,299 6,309 6,232
Net income per share, diluted $ 0.40 $ 0.95 $ 0.37
====== ====== ======
</TABLE>
For the year ended December 31, 1999, options to purchase 155,834 shares
at an average exercise price of $23.75 have not been included in the
computation of diluted net income per share as their effect would have been
anti-dilutive.
Stock-Based Compensation Plans
The Company has adopted the disclosure requirements of SFAS No. 123 "Accounting
for Stock-Based Compensation." The Company continues to recognize compensation
costs using the intrinsic value based method described in Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees."
In May 1994 the stockholders approved the 1994 Stock Option Plan (the "1994
Plan"). The 1994 Plan provides that officers and key employees may be granted
either nonqualified or incentive stock options for the purchase of the Company's
common stock at the fair market value at the
-30-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
E. STOCKHOLDERS' EQUITY (continued)
date of grant. The employee options granted generally become exercisable at a
rate of 20% per year and expire ten years from the date of grant. Certain
options, as originally granted, became exercisable only to the extent the
Company achieved specific financial goals. During 1995 these options were
amended to provide for vesting on the earlier of the six-year anniversary of the
date of grant or the original vesting schedule upon the achievement of the
aforementioned financial goals. In 1998 the Company achieved the specific
financial goals as outlined in the 1994 Plan and as such fully recognized the
related compensation expense. Compensation expense of $21,000, $603,000 and
$79,000 was recorded in 1999, 1998, and 1997 and accumulated deferred
compensation was $559,000 and $1.6 million at December 31, 1999 and 1998,
respectively.
The 1991 Stock Option Plan also remains in effect, providing for similar grants
to officers and employees. Additionally, the 1991 Stock Option Plan provides for
an automatic annual grant to non-employee directors. The non-employee director
options become exercisable in three equal installments with the first
installment exercisable on the date of grant and an additional one-third
becoming exercisable on each of the next two anniversary dates. The options
expire ten years from date of grant.
In July, 1998, the Company's Board of Directors adopted a Shareholder Rights
Plan in which common stock purchase rights were distributed as a dividend at the
rate of one Right for each share of the Company's Common Stock outstanding as of
the close of business on August 3, 1998. This plan was adopted as a means of
deterring possible coercive or unfair takeover tactics and to prevent a
potential acquirer from gaining control of the Company without offering a fair
price to all of the Company's shareholders. Unless the Rights are redeemed or
exchanged earlier, they will expire on July 24, 2008. No rights were exercised
through December 31, 1999.
In May 1996 the Company, upon approval by the Board of Directors and
stockholders, increased the total number of shares approved for future grant
under plans currently in effect by 300,000 for the 1994 Stock Option Plan and
25,000 for the 1991 Stock Option Plan. At December 31, 1999 shares available for
future grants under all option plans were 55,430.
Net income and net income per share as reported in these financial statements
and on a pro forma basis for the years ended December 31, 1999, 1998 and 1997,
as if the fair value based method described in SFAS No. 123 had been adopted are
as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C> <C>
Net income As Reported $2,506 $5,986 $2,298
Pro Forma $1,887 $5,388 $1,973
Basic net income per share As Reported $0.43 $1.03 $0.40
Pro Forma $0.32 $0.93 $0.34
Diluted net income per share As Reported $0.40 $0.95 $0.37
Pro Forma $0.31 $0.87 $0.32
</TABLE>
-31-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
E. STOCKHOLDERS' EQUITY (continued)
The effect of applying SFAS No. 123 for the purpose of providing pro forma
disclosure may not be indicative of the effects on reported net income and net
income per share for future years. The pro forma disclosures include the effects
of all awards granted after January 1, 1995 and additional awards in future
years are anticipated.
For the purpose of providing pro forma disclosures, the fair values of stock
options granted were estimated using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants in 1999, 1998 and
1997, respectively: a risk-free interest rate of 6.0%, 5.5% and 6.3%; an
expected life of 7 years in 1999 and 6 years in 1998 and 1997; expected
volatility of 33%, 35% and 37%; and no expected dividends.
The following table summarizes all stock option plan activity for the years
ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ------------------------ -------------------------
Wgtd. Avg. Wgtd. Avg. Wgtd. Avg.
Shares Exer. Price Shares Exer. Price Shares Exer. Price
------- ----------- ------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding
at beginning of year 924,550 $10.71 831,410 $ 8.37 875,657 $ 6.24
Granted 134,000 18.00 163,084 23.69 128,450 17.03
Exercised (138,243) 4.60 (37,364) 10.36 (143,546) 3.43
Cancelled or lapsed (10,784) 15.51 (32,580) 16.28 (29,151) 7.00
------- ------- --------
Outstanding at end of year 909,523 $12.66 924,550 $10.71 831,410 $8.37
======= ======= ========
Options exercisable
at year end 554,866 $9.86 542,090 $7.54 380,709 $7.01
Weighted average fair value
of options granted at fair
market value during the year $7.90 $10.58 $8.12
</TABLE>
-32-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
E. STOCKHOLDERS' EQUITY (continued)
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------------------------- ----------------------------------
Number Weighted Average Number
Range of Outstanding Remaining Weighted Average Exercisable Weighted Average
Exercise Prices at 12/31/99 Contractual Life Exercise Price at 12/31/99 Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$3.00-$5.00 241,595 2.9 $ 3.77 227,590 $3.71
5.50-10.00 115,624 3.8 6.75 80,151 6.90
11.19-14.81 175,530 5.5 12.61 124,430 12.55
16.19-19.88 228,960 8.2 17.81 61,913 17.19
21.13-24.00 147,814 8.1 23.88 60,782 23.83
------- -------
$3.00-$24.00 909,523 5.7 $12.66 554,866 $9.86
======= =======
</TABLE>
In May 1995 the stockholders approved the Lifeline Employee Stock Purchase
Plan (ESPP) whereby eligible employees may invest up to 10% of their base
salary in shares of the Company's common stock. The purchase price of the
shares is 90% of the fair market value of the stock on either the
commencement date or the date of purchase whichever is lower. Under the
Plan, 200,000 shares of common stock are available for purchase over ten
offering periods through April 2000, of which approximately 149,816 shares
remain available. No shares were purchased under the ESPP in 1999. Shares
purchased under the ESPP in 1998 and 1997 totaled 12,300 and 15,012,
respectively. The weighted-average grant-date fair value of shares
purchased under the ESPP was $19.80 and $17.79 in 1998 and 1997,
respectively.
For the purpose of providing pro forma disclosures, the fair values of
shares purchased were estimated using the Black-Scholes option-pricing
model with the following weighted-average assumptions used for purchases in
1998 and 1997 respectively: a risk free interest rate of 5.2%, and 5.9%; an
expected life of 6 months in each year; expected volatility of 30% in 1998
and 1997; and no expected dividends.
Common Stock
In August 1999, the Company loaned $300,000 to its Chief Executive Officer,
pursuant to a collateralized promissory note, for the exercise of a stock
option which was to expire. The note, which bears interest at a rate of
6.77% per annum, payable annually in arrears, is due August 23, 2004 and is
collateralized by a pledge of 16,552 shares of common stock of the Company.
The Chief Executive Officer has the right to put the shares back to the
Company at a price equal to $16.3125 commencing February 23, 2001 for a
period of eighteen months expiring August 23, 2002.
-33-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
E. STOCKHOLDERS' EQUITY (continued)
On September 11, 1995 the Company issued 8,939 shares of its common stock
at a price of $11.188, which represented the fair market value of the
common stock on that date, to an officer of the Company in exchange for a
collateralized promissory note in the amount of $100,000. The note, which
bears interest at a rate of 6.3% per annum, payable annually in arrears, is
due September 2002.
In September 1992 the Company sold to its Chief Executive Officer 83,333
shares of the Company's common stock at a price of $3.00 per share (which
represented the fair market value of the common stock on August 27, 1992,
the Chief Executive Officer's date of hire) for an aggregate price of
$250,000. The Company loaned $250,000 to its Chief Executive Officer for
seven years at an annual interest rate of 5.98% pursuant to the term of a
promissory note which was collateralized by the common stock that was
purchased. The promissory note was due September 1, 1999. On February 24,
1997, the Company's Chief Executive Officer repaid the full promissory
note, in part by exercising stock options and selling 10,700 shares of
common stock back to the Company at fair market value on such date
($17.00), the proceeds of which were used to help repay the promissory
note.
F. INCOME TAXES
The provision (benefit) for income taxes was computed as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------
(Dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes:
Current ($110) $2,036 $1,720
Deferred 1,316 1,120 (586)
- -------------------------------------------------------------------------------
1,206 3,156 1,134
- -------------------------------------------------------------------------------
State income taxes:
Current 22 538 504
Deferred 178 263 (131)
- -------------------------------------------------------------------------------
200 801 373
- -------------------------------------------------------------------------------
Foreign income taxes 264 33 116
- -------------------------------------------------------------------------------
Provision for income taxes $1,670 $3,990 $1,623
===============================================================================
</TABLE>
-34-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
F. INCOME TAXES (continued)
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Total deferred tax assets $1,788 $2,238
Total deferred tax liabilities (4,592) (3,548)
- ----------------------------------------------------------------------------------------------
Net deferred tax liability ($2,804) ($1,310)
==============================================================================================
Deferred tax assets (liabilities) are comprised of the following
significant items at December 31:
<CAPTION>
1999 1998
------ ----
<S> <C> <C>
Current deferred tax assets:
Inventory and warranty reserves $579 $328
Restructuring reserve 253 339
Deferred compensation 216 620
Deferred revenue 260 234
Accounts receivable reserves 315 130
Accrued vacation and other reserves 165 587
- ----------------------------------------------------------------------------------------------
Net current deferred tax asset 1,788 2,238
- ----------------------------------------------------------------------------------------------
Noncurrent deferred tax assets (liabilities):
Sales type leases (4,142) (4,118)
Restructuring reserve 836 690
Depreciation (1,286) (120)
Amortization -- --
- ----------------------------------------------------------------------------------------------
Net noncurrent deferred tax liability (4,592) (3,548)
- ----------------------------------------------------------------------------------------------
Net deferred tax liability ($2,804) ($1,310)
==============================================================================================
</TABLE>
The differences between the statutory U.S. federal income tax rate and the
Company's effective tax rate are as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------
(Dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision at statutory rate $ 1,420 $ 3,457 $ 1,336
State income tax, net of federal tax effect 188 529 246
Tax exempt income (2) (34) (68)
Goodwill 51 26 112
Foreign rate differences 40 30 65
Other, net (27) (18) (68)
- -------------------------------------------------------------------------------------
Provision for income taxes $ 1,670 $ 3,990 $ 1,623
=====================================================================================
</TABLE>
-35-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
G. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) defined contribution savings plan covering
substantially all of its employees. The Company's contributions, which are
included in selling, general and administrative expenses, were $434,000,
$372,000 and $354,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
H. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes amounted to $2,134,000, $1,624,000 and $2,313,000
during 1999, 1998 and 1997, respectively. Interest paid was $129,000, $47,000
and $20,000 during 1999, 1998 and 1997, respectively.
I. GOODWILL and INTANGIBLES
During 1999, the Company paid approximately $4.4 million to local community
hospitals for conversions to services provided by the Company. Intangible assets
related to these service agreements consist of the cost of purchasing the rights
to service and/or manage the personal response systems (PRS) program located in
various stand-alone facilities. These agreements allow the Company to monitor
and provide other related services to existing and future subscribers over the
term of the agreements. The Company amortizes the acquisition costs over the
life of the agreements, which is typically five years.
Intangible amortization expense was $565,000, $83,000, and $0 for the years
ended December 31, 1999, 1998 and 1997, respectively. Intangible accumulated
amortization amounted to $565,000 and $83,000 as of December 31, 1999 and 1998
respectively.
In August 1999 the Company completed the acquisition of TelCARE Systems, Inc. of
Denver, Colorado. TelCARE provides personal response services. The purchase
price was approximately $943,000 which was financed by borrowing $0.9 million on
a pre-existing line of credit. The acquisition was accounted for as a purchase
transaction and, as a result, the Company recorded goodwill of approximately
$913,000 to be amortized over an estimated life of five years. The results of
the acquired business are included in the Company's consolidated financial
statements from the date of acquisition and did not have a material impact on
1999 operating results.
In November 1998 the Company completed the acquisition of the assets of
AlertCall, Inc. of Amherst, New York. AlertCall was a distributor of the
Company's personal response products and services. The purchase price was
approximately $1.5 million. The acquisition was accounted for as a purchase
transaction and, as a result, the Company recorded goodwill of approximately
$1.1 million, which is being amortized over an estimated life of five years. The
results of the acquired business have been included in the Company's
consolidated financial statements from the date of the acquisition.
-36-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
I. GOODWILL and INTANGIBLES
Goodwill amortization expense was $376,000, $110,000, and $542,000 for the years
ended 1999, 1998 and 1997, respectively. Accumulated goodwill amortization
amounted to $476,000 and $155,000 as of December 31, 1999 and 1998,
respectively.
J. RESTRUCTURING AND NON RECURRING CHARGES
In December 1997, the Company approved a restructuring plan to improve operating
efficiencies and reduce costs, and recorded a pre-tax restructuring charge of
$4.3 million. This charge was established to provide for a business
reorganization which included relocation of the Company's corporate
headquarters, work force reduction and write down of impaired assets in
accordance with SFAS 121.
During 1998 and 1999, certain events occurred which resulted in changes to the
Company's original estimates. In the second quarter of 1998, the Company made a
determination to retain certain employees originally scheduled to be terminated.
As a result, it reversed approximately $200,000 of the original severance
reserve. In February 1999, the Company negotiated a buyout of its old corporate
headquarters facility lease, which eliminated the requirement for rental
commitment payments of $655,000. In addition, the delay of the Company's move to
its new corporate headquarters extended the period of depreciation expense of
its fixed assets related to its old corporate headquarters and reduced the net
book value write off at the abandonment date amounting to $155,000.
In June 1999, the Company recorded a pre-tax restructuring charge of
approximately $2.2 million. Nearly $1.7 million was recorded as a result of the
outsourcing of the Company's equipment manufacturing operations to Ademco, an
international manufacturer of electronic equipment and a division of Honeywell
International, Inc.. This charge included approximately $1.3 million of costs
related to the reduction in the Company's manufacturing workforce, and nearly
$379,000 of costs associated with the write down of certain manufacturing fixed
assets. During the second quarter of 1999, certain events occurred which
resulted in changes to the Company's original estimates for the cost of its
corporate headquarters' relocation. As a result, the restructuring charge
includes approximately $520,000 of costs not reflected in the Company's December
1997 restructuring charge (described above) associated with closing the
Company's operations located in Cambridge, Massachusetts.
On September 2, 1999, the Company and Protection One mutually agreed to
terminate their proposed merger agreement. In September 1999, the Company
recorded a pre-tax charge of $423,000 for unreimbursed costs incurred in
connection with the proposed merger. These costs included such items as
investment banker, legal and independent accountant fees.
At December 31, 1999, accrued restructuring and other non-recurring charges of
nearly $656,000 represented approximately $522,000 of total remaining severance
costs and $134,000 of unpaid, unreimbursed costs which are associated with the
termination of the merger agreement with Protection One.
-37-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
J. RESTRUCTURING (continued)
The following is a summary of activity for 1999:
<TABLE>
<CAPTION>
December 31, Amounts Amounts December 31,
1998 Recorded Utilized 1999
-----------------------------------------------------
<S> <C> <C> <C> <C>
Non-cash write down $ 536 $ 380 ($ 916) $ --
of fixed assets
Reduction of workforce 327 1,300 (1,105) 522
and other cash flows
Corporate relocation -- 520 (520) --
Unreimbursed merger -- 423 (289) 134
costs
-----------------------------------------------------
Total $ 863 $2,623 ($2,830) $ 656
=====================================================
</TABLE>
K. LONG TERM DEBT
In June 1999, the Company entered into an amended and restated $10.0 million
line of credit which was originally obtained in April 1998. The agreement
contains several covenants, including the Company maintaining certain levels of
financial performance and capital structure. These financial covenants include a
requirement for a current ratio of at least 1.5 to 1.0 and a leverage ratio of
no more than 1.25 to 1.0 through the quarter ending March 31, 2000 and 1.0 to
1.0 thereafter. In addition, there are certain negative covenants that include
limitations on the Company's capital and other expenditures, restrictions on the
Company's capacity to obtain additional debt financing, restrictions on the
disposition of the Company's assets, and restrictions on its investment
portfolio. The Company was not in compliance with certain covenants during
certain quarters of 1999. The Company obtained waivers from its bank for these
covenants. The line of credit matures on June 30, 2002, and as of December 31,
1999 the Company had borrowed $2.0 million under this line.
The agreement has two components, the first being a working line of credit.
Borrowings under this portion of the line are based on the London Interbank
Offered Rate (LIBOR) interest rate plus .75%. As of December 31, 1999 the
Company has borrowed $855,000 under this section of the line and the interest
rate was 7.617%. The other component of this agreement is the ability to convert
up five million dollars into a five year fixed loan at the Bank's prime interest
rate at the date of conversion. As of December 31, 1999 the Company has
converted $1,125,000 of it's line into a fixed loan at an interest rate of
8.50%. Principal payments are to be made in monthly installments.
-38-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
K. LONG TERM DEBT (continued)
Future line of credit loan payments at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
2000 $ 225
2001 225
2002 1,080
2003 225
2004 225
- ---------------------------------------------------------------------
Total future payments $1,980
=====================================================================
</TABLE>
L. SEGMENT INFORMATION
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 131 establishes standards
for reporting information regarding operating segments and related disclosures
about products and services, geographic areas and major customers.
The Company is active in one business segment: designing, marketing, monitoring
and supporting its personal response units. The Company maintains sales and
marketing operations in both the United States and Canada.
Geographic Segment Data
Net revenues to external customers are based on the location of the customer.
Geographic information as of December 31, 1999, 1998 and 1997 is presented as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------
<S> <C> <C> <C>
Net Sales:
United States $65,124 $60,049 $52,922
Canada 5,213 4,361 4,042
-----------------------------------------------
-----------------------------------------------
$70,337 $64,410 $56,964
===============================================
Net Income (Loss):
United States $ 2,305 $ 6,096 $ 3,001
Canada 201 (703)
(110)
-----------------------------------------------
$ 2,506 $ 5,986 $ 2,298
===============================================
Total Assets:
United States $53,970 $49,348 $40,008
Canada 3,415 3,156 2,261
------------------------------------------------
$57,385 $52,504 $42,269
================================================
</TABLE>
-39-
<PAGE>
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
-40-
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information under the heading "Election of Directors" in the Company's
definitive proxy material for its 2000 annual meeting of stockholders is
incorporated herein by reference. Information concerning officers of the Company
appears in Part I of this Annual Report on Form 10-K.
ITEM 11. Executive Compensation
The information under the heading "Executive Compensation," excluding the
"Compensation Committee Report on Executive Compensation" and the Stock Price
Performance Graph in the Company's definitive proxy material for its 2000 annual
meeting of stockholders is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security ownership of certain beneficial owners: The information under
the heading "Beneficial Ownership of Common Stock" in the Company's
definitive proxy material for its 2000 annual meeting of stockholders
is incorporated herein by reference.
(b) Security ownership of management: The information under the heading
"Beneficial Ownership of Common Stock" in the Company's definitive
proxy material for its 2000 annual meeting of stockholders is
incorporated herein by reference.
(c) Changes in control: None known.
ITEM 13. Certain Relationships and Related Transactions
The information under the heading "Certain Relationships and Related
Transactions," in the Company's definitive proxy material for its 2000 annual
meeting of stockholders is incorporated herein by reference.
-41-
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
The following consolidated financial statements of Lifeline Systems, Inc.
and the report of independent accountants relating thereto, are set forth in
Item 8 of this Annual Report on Form 10-K on the pages indicated.
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Report of Independent Accountants 18
Consolidated Balance Sheets as of December 31, 1999 and 1998 19
Consolidated Statements of Income and Comprehensive Income
for the years ended December 31, 1999, 1998, and 1997 20
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1999, 1998, and 1997 21
Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998, and 1997 22
Notes to Consolidated Financial Statements 23-40
</TABLE>
(a)(2) Financial Statement Schedule
The following financial statement schedule of Lifeline Systems, Inc. is
filed herewith and included in ITEM 14 (a)(2) on the pages indicated below.
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Schedule II - Valuation and Qualifying Accounts for
the years ended December 31, 1999, 1998 and 1997 50
</TABLE>
All other schedules are omitted because they are not applicable, not
required, or because the required information is included in the financial
statements or notes thereto.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K with the Securities and Exchange
Commission during the quarter ended December 31, 1999.
(c) Exhibits
The Exhibits which are filed with this Report or which are incorporated
herein by reference are set forth in the Exhibit Index, which appears on pages
44 through 49 hereof.
-42-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LIFELINE SYSTEMS, INC.
March 30, 2000 By: /s/ Ronald Feinstein
- ---------------------------------------- -----------------------
Date Ronald Feinstein
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/ L. Dennis Shapiro Chairman of the Board March 30, 2000
- ---------------------------------------- --------------
L. Dennis Shapiro
/s/ Ronald Feinstein Chief Executive Officer, March 30, 2000
- ---------------------------------------- President and Director (Principal --------------
Ronald Feinstein Executive Officer)
/s/ Dennis M. Hurley Vice President of Finance March 30, 2000
- ---------------------------------------- (Principal Financial and --------------
Dennis M. Hurley Accounting Officer)
/s/ Susan S. Bailis Director March 30, 2000
- ---------------------------------------- --------------
Susan S. Bailis
/s/ Everett N. Baldwin Director March 30, 2000
- ---------------------------------------- --------------
Everett N. Baldwin
/s/ Joseph E. Kasputys Director March 30, 2000
- ---------------------------------------- --------------
Joseph E. Kasputys
/s/ Carolyn C. Roberts Director March 30, 2000
- ---------------------------------------- --------------
Carolyn C. Roberts
/s/ Gordon C. Vineyard Director March 30, 2000
- ---------------------------------------- --------------
Gordon C. Vineyard
</TABLE>
-43-
<PAGE>
EXHIBIT INDEX
The following designated exhibits are, as indicated below, either filed
herewith or have heretofore been filed with the Securities and Exchange
Commission under the Securities Act of 1933 or the Securities and Exchange Act
of 1934 and are referred to and incorporated herein by reference to such
filings.
<TABLE>
<CAPTION>
Exhibit No. Exhibit SEC Document Reference
- ----------- ------- ----------------------
<S> <C> <C>
Exhibit 3. Articles of Incorporation and By-Laws
3.1 Articles of Organization of Lifeline Systems, Inc., 2-84060 Exhibit 3.1
as amended.
3.2 Articles of Amendment of Lifeline Systems, Inc. 1987 10K Exhibit 3.4
3.3 Restated By-Laws of Lifeline Systems, Inc. 1990 10K Exhibit 3.4
Exhibit 4. Instruments Defining the Rights of Security Holders
4.1 Specimen Stock Certificate. 2-84060 Exhibit 4.1
4.2 Shareholder Rights Plan dated July 24, 1998 8-K dated August 5, 1998
4.3 Amendment Number 1 to Shareholder 10Q for the quarter ended
Rights Plan dated October 18, 1998 September 30, 1998 Exhibit 4.3
Exhibit 10. Material Contracts
10.01 Registrant's 1982 Incentive Stock Option Plan 2-84060 Exhibit 10.19
and form of Option Agreement.
10.02 Registrant's 1982-A Incentive Stock Option Plan and 2-84060 Exhibit 10.20
form of Option Agreement.
10.03 Medical Expense Reimbursement Plan. 2-84060 Exhibit 10.21
10.04 Registrant's 1986 Incentive Stock 33-12030 Exhibit 10.26
Option Plan and form of Option Agreement
10.05 Amendments to Registrant's 1986 Incentive 1987 10K Exhibit 10.13
Stock Option Plan.
10.06 Registrant's 1982 Incentive Stock Option Plan, 1988 10K Exhibit 10.14
as amended.
10.07 Registrant's 1982-A Incentive Stock Option Plan, 1988 10K Exhibit 10.15
as amended.
10.08 Amendment to Registrant's 1986 Incentive Proxy Statement filed
Stock Option Plan. April 13, 1989 (0-13617)
10.09 Registrant's 1991 Stock Option Plan. 1990 10K Exhibit 10.37
</TABLE>
-44-
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit SEC Document Reference
- ----------- ------- ----------------------
<S> <C> <C>
10.10 Form of Non-statutory Stock Option Agreement 1992 10K Exhibit 10.32
for Registrant's 1991 Stock Option Plan.
10.11 Form of Special Non-statutory Stock Option Agreement 1992 10K Exhibit 10.33
for Registrant's 1991 Stock Option Plan.
10.12 Lease Agreement between the Registrant and 1992 10K Exhibit 10.34
the Massachusetts Institute of Technology,
dated April 3, 1992.
10.13 First Amendment to Lease Agreement dated April 3, 1992 1992 10K Exhibit 10.35
between the Registrant and the Massachusetts Institute of
Technology, dated August 25, 1992.
10.14 Amended Employment and Noncompetition Agreement 1992 10K Exhibit 10.36
between Ronald Feinstein and the Registrant,
dated August 27, 1992.
10.15 Secured Promissory Note between Ronald Feinstein and 1992 10K Exhibit 10.37
the Registrant, dated September 1, 1992.
10.16 Security and Pledge Agreement between 1992 10K Exhibit 10.38
Ronald Feinstein and the Registrant,
dated September 1, 1992.
10.17 Non-statutory Stock Option Agreement, as amended, between 1992 10K Exhibit 10.39
Ronald Feinstein and the Registrant,
dated August 27, 1992.
10.18 Special Non-statutory Stock Option Agreement, as amended, 1992 10K Exhibit 10.40
between Ronald Feinstein and the Registrant,
dated August 27, 1992.
10.19 Second Amendment to Lease Agreement dated 10Q for the Quarter
April 3, 1992 between the Registrant and ended June 30, 1993
the Massachusetts Institute of Technology, Exhibit 10.42
dated May 18, 1993.
10.20 Amended and Restated Asset Purchase Agreement 10Q for the Quarter
dated September 9, 1993 between the Registrant and ended September 30,1993
CarePartners, Inc. Exhibit 10.43
10.21 Second Amendment to Lease Agreement 1993 10K Exhibit 10.44
dated August 31, 1989 and Consent to
Assignment of Lease between the Registrant
and Tierrasanta 234 dated September 9, 1993.
10.22 Letter Agreement between Ronald Feinstein 1993 10K Exhibit 10.45
and the Registrant dated March 4, 1994.
</TABLE>
-45-
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit SEC Document Reference
- ----------- ------- ----------------------
<S> <C> <C>
10.23 Nonstatutory Stock Option Agreement between 1993 10K Exhibit 10.46
Ronald Feinstein and the Registrant dated
February 11, 1994.
10.24 Third Amendment to Lease Agreement dated April 3, 1992 10Q for the Quarter
between the Registrant and the Massachusetts ended March 31, 1993
Institute of Technology Exhibit 10.47
10.25 Registrant's 1994 Stock Option Plan. 1994 10K Exhibit 10.48
10.26 Form of Non-statutory Stock Option Agreement 1994 10K Exhibit 10.49
for Registrant's 1994 Stock Option Plan.
10.27 Form of Special Non-statutory Stock Option Agreement 1994 10K Exhibit 10.50
for Registrant's 1994 Stock Option Plan.
10.28 Master Lease Agreement between Registrant and 1994 10K Exhibit 10.51
Bell Atlantic-TriCon Leasing Corporation
10.29 Master Lease Agreement between Registrant and 1994 10K Exhibit 10.52
U.S. Leasing Corporation
10.30 Secured Promissory Note between Thomas E. Loper
and the Registrant, dated September 11, 1995. 1995 10K Exhibit 10.30
10.31 Security and Pledge Agreement between
Thomas E. Loper and the Registrant,
dated September 11, 1995. 1995 10K Exhibit 10.31
10.32 Asset Purchase Agreement dated May 17, 1995
between the Registrant and Martha's Vineyard
Hospital Foundation. 1995 10K Exhibit 10.32
10.33 Form of the Non-statutory Stock Option
Agreement to Registrant's 1991 Stock
Option Plan 1995 10K Exhibit 10.33
10.34 Form of the Non-statutory Stock Option
Agreement to Registrant's 1994 Stock
Option Plan 1995 10K Exhibit 10.34
10.35 1995 Employee Stock Purchase Plan 1995 10K Exhibit 10.35
10.36 Revolving Credit Agreement between
the First National Bank of Boston
and the Registrant, dated November 30, 1995 1995 10K Exhibit 10.36
</TABLE>
-46-
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit SEC Document Reference
- ----------- ------- ----------------------
<S> <C> <C>
10.37 Amended Employment Agreement between
Ronald Feinstein and the Registrant, 10Q for the quarter ended
dated June 14, 1996 June 30, 1996, Exhibit 10.60
10.38 Employment Agreement between Len Wechsler
and Lifeline Systems (Canada), Inc. 10Q for the quarter ended
dated July 3, 1996 September 30, 1996, Exhibit 10.60
10.39 Stock purchase agreement between
Lifeline Systems (Canada), Inc. and
Len Wechsler dated July 3, 1996 10Q for the quarter ended
September 30, 1996, Exhibit 10.61
10.40 Stock purchase agreement between
Lifeline Systems (Canada), Inc., and
CareTel, Inc. and the stockholders of 10Q for the quarter ended
CareTel, Inc., dated July 3, 1996 September 30, 1996, Exhibit 10.62
10.41 Amendment to Registrant's 1991
Stock Option Plan 1996 10K Exhibit 10.41
10.42 Amendment to Registrant's 1994 1996 10K Exhibit 10.42
Stock Option Plan
10.43 First Amendment to Revolving Credit Agreement
between the First National Bank of Boston
and the Registrant dated November 29, 1996 1996 10K Exhibit 10.43
10.44 Lease Agreement between the Registrant and
Bishop/Clark Associates Limited Partnership
dated November 11, 1997 1997 10K Exhibit 10.44
10.45 Second Amendment to Revolving Credit Agreement
between the First National Bank of Boston
and the Registrant dated December 31, 1997 1997 10K Exhibit 10.45
10.46 Offer to Lease between CareTel, Inc. and Graduate Holdings
Limited and Samuel Sarick Limited
dated September 1, 1994 1997 10K Exhibit 10.46
10.47 Form of Lease Agreement between Lifeline Systems, Canada and
Samuel Sarick Limited and Graduate Holdings Limited
dated January 29, 1998 1997 10K Exhibit 10.47
10.48 Master Agreement for Professional Services between
Cambridge Technology Partners and the
Registrant dated June 16, 1997 1997 10K Exhibit 10.48
</TABLE>
-47-
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit SEC Document Reference
- ----------- ------- ----------------------
<S> <C> <C>
10.49 Form of Change in Control Agreement for
for the following Named Executives:
following Named Executives:
Mr. Richard Reich, Mr. Thomas Loper,
Mr. Dennis Hurley, Mr. John Gugliotta 1997 10K Exhibit 10.49
10.50 Fourth Amendment to Lease Agreement dated
April 3, 1992 between the Registrant and the 10Q for the quarter ended
Massachusetts Institute of Technology March 31, 1998 Exhibit 10.50
10.51 Revolving Line of Credit between
State Street Bank and Trust Company 10Q for the quarter ended
and the Registrant, dated April 22, 1998 June 30, 1998 Exhibit 10.51
10.52 First amendment to lease agreement
between Registrant and Bishop/Clark Associates 10Q for the quarter ended
Limited Partnership dated June 30, 1998 June 30, 1998 Exhibit 10.52
10.53 Lease agreement between the Registrant and 10Q for the quarter ended
Triangle Realty Trust dated August, 1998 September 30, 1998 Exhibit 10.53
10.54 Amended and Restated Agreement and Plan of
Contribution and Merger dated October 28, 1998 8-K dated October 30,1998
10.55 Lease Termination Agreement between the Registrant
and Massachusetts Institute of Technology
dated January 29, 1999. 1999 10K Exhibit 10.55
10.56 Sublease Agreement between the Registrant and Millennium
Pharmaceuticals, Inc. dated January 29, 1999 1999 10K Exhibit 10.56
10.57 Consent to Sublease and Agreement between the Registrant,
Massachusetts Institute of Technology and Millennium
Pharmaceuticals, Inc. dated January 29, 1999 1999 10K Exhibit 10.57
10.58 Notice of Termination of Lease dated January 29, 1999 1999 10K Exhibit 10.58
10.59 Asset Purchase Agreement dated November 13, 1998
between the Registrant and Homemakers Upstate
Group 1999 10K Exhibit 10.59
10.60 Master Lease Agreement between the
Registrant and Andover Capital Group 10Q for the quarter ended
dated March 11, 1999 March 31, 1999 Exhibit 10.60
10.61 Loan Document Modification Agreement between
State Street Bank and Trust Company and 10Q for the quarter ended
the Registrant dated June 30, 1999 September 30, 1999 Exhibit 10.61
</TABLE>
-48-
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit SEC Document Reference
- ----------- ------- ----------------------
<S> <C> <C>
10.62 Amended and Restated Note between State Street
Bank and Trust Company and the Registrant 10Q for the quarter ended
dated June 30, 1999 September 30, 1999 Exhibit 10.62
10.63 Secured Promissory Note between Ronald Feinstein 10Q for the quarter ended
and the Registrant, dated August 23, 1999 September 30, 1999 Exhibit 10.63
10.64 Security and Pledge Agreement between Ronald 10Q for the quarter ended
Feinstein and the Registrant, September 30, 1999 Exhibit 10.64
dated August 23, 1999
Filed herewith:
10.65 The supply agreement between the Ademco Group
a division of Honeywell International, Inc.,
formerly the Pittway Corporation and the
Registrant dated December 29, 1999
10.66 Termination Agreement, Mutual Releases and
Covenants Not to Sue between Protection One
and the Registrant dated September 2, 1999
10.67 Second amendment to lease agreement between
Registrant and Bishop/Clark Associates
Limited Partnership dated November 18, 1999
Exhibit 21. Subsidiaries.
Filed herewith:
21.1 Subsidiaries of Lifeline Systems, Inc.
Exhibit 23. Consents of Experts and Counsel.
Filed herewith:
23.1 Consent of PriceWaterhouseCoopers LLP
</TABLE>
-49-
<PAGE>
LIFELINE SYSTEMS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1999, 1998, and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Additions
Balance at Charged to
Beginning Costs & Balance at
Description of Year Expenses Deductions(1) End of Year
- ----------- ------- -------- ------------- -----------
<S> <C> <C> <C> <C>
1999
Allowance for doubtful receivables:
Trade accounts receivable $239 $528 $ 61 $706
Lease receivables 190 -- 43 $147
---- ---- ---- ----
Total $429 $528 $104 $853
1998
Allowance for doubtful receivables:
Trade accounts receivable $216 $138 $115 $239
Lease receivables 190 -- -- 190
---- ---- ---- ----
Total $406 $138 $115 $429
1997
Allowance for doubtful receivables:
Trade accounts receivable $197 $ 71 $ 52 $216
Lease receivables 176 14 -- 190
---- ---- ---- ----
Total $373 $ 85 $ 52 $406
</TABLE>
(1) Uncollectible accounts and adjustments.
-50-
<PAGE>
EXHIBIT 10.65
Ademco Agreement.doc
SUPPLY AGREEMENT
THIS AGREEMENT, made and entered into as of the 28th day of December,
1999, is by and between Alarm Device Manufacturing Company ("Ademco"), a
division of Pittway Corporation, a Delaware corporation ("Pittway"), and
Lifeline Systems, Inc., a Massachusetts corporation ("Lifeline").
WHEREAS, Lifeline is engaged in the manufacture of personal emergency
response communications and related products and the rendering of monitoring
services related to such products;
WHEREAS, Lifeline has decided to cease the internal manufacture of its
personal emergency response communications products; and
WHEREAS, Ademco is willing to supply Lifeline with such personal emergency
response communications products, on the terms and conditions hereafter set
forth;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Ademco and Lifeline, intending to
be legally bound, hereby agree as follows:
1. Term. The term of this Agreement (the "Term") shall commence upon the
date hereof and, unless earlier terminated in accordance with Section 13, shall
continue until such date as of which it shall be terminated either (i) by
Ademco, upon not less than one year's prior written notice to Lifeline given not
earlier than the first anniversary of the date on which Ademco first ships any
Product (as defined below) to Lifeline in fulfillment of an order placed under
this Agreement or (ii) by Lifeline, upon not less than 180 days' prior written
notice to Ademco.
2. Products and Services; Specifications.
(a) The products to which this Agreement relates are those listed on
Exhibit A hereto on the date of this Agreement (the "Initial Products") and such
other products relating to Lifeline's personal emergency response business as
may be added to Exhibit A from time to time as hereinafter provided, if any (the
"Future Products") (the Initial Products and the Future Products being referred
to individually as a "Product" and collectively as the "Products").
If Lifeline desires to add to Exhibit A a product relating to its personal
emergency response business, it shall propose such addition to Ademco in
writing, which proposal shall include Lifeline's proposed Specifications for
such product. Ademco may decline to add such product to Exhibit A if either (i)
after giving effect to such addition, the number of Future Products added to
Exhibit A during the period of 18 months then ended would exceed five, or (ii)
in Ademco's reasonable judgment, the addition of such product would adversely
impact Ademco in terms of its increased exposure to product liability claims,
its exposure to breach of
<PAGE>
contract claims, its financial condition or its reputation; but Ademco may not
decline to add such product to Exhibit A on the basis of anticipated small
production runs or low sales volume of such product. Ademco shall notify
Lifeline in writing within 30 days after its receipt of such a proposal whether
Ademco agrees to add the proposed product to Exhibit A. If Ademco declines, such
notice shall include Ademco's basis for declining and, if such basis is solely
the particulars of the Specifications proposed by Lifeline, its objections to
such proposed Specifications. Ademco and Lifeline shall attempt in good faith to
resolve any such objections to the inclusion of such product on Exhibit A within
30 days after Ademco's delivery of such notice.
Notwithstanding the preceding paragraph, in the event that Lifeline
proposes to add to Exhibit A a product consisting of an RF smoke detector (and
unless Ademco declines to add such product to Exhibit A pursuant to this
Agreement), Ademco shall use commercially reasonable efforts to procure the
components necessary for it to be able to manufacture such product; but in the
event it is unable to procure such components, it shall have no obligation
hereunder with respect to such product.
For purposes of this Agreement, a product shall be treated as a different
Product rather than an enhanced or derivative form of a then-existing Product
only if its "look and feel" differs from any then-existing Product or it
contains functions, features or performance characteristics, or a combination
thereof, materially different from those in any then-existing Product.
(b) Each Product purchased and sold pursuant to this Agreement shall
be manufactured, labeled and packaged by Ademco in accordance with the
applicable specifications (including configurations, communications protocols
and radio frequency signaling protocols, labeling and packaging requirements)
set forth from time to time in Exhibit B attached hereto (the "Specifications").
The Specifications shall not be modified or amended without the express written
consent of Ademco and Lifeline. Ademco shall not substitute Product components
set forth in the Specifications without the prior written consent of Lifeline.
(c) Ademco shall not utilize any subcontractor or other vendor in
connection with the manufacture of any of the Products without the approval of
Lifeline in writing. Exhibit C hereto lists the subcontractors and other vendors
initially approved by Lifeline. Ademco shall not change any such subcontractor
or other vendor without the prior written consent of Lifeline; but in the event
any such subcontractor or other vendor ceases doing business or ceases doing
business with Ademco, Lifeline shall not unreasonably delay approval of a
substitute. Lifeline may direct Ademco in writing to utilize a particular
subcontractor or other vendor for a particular purpose; provided that if Ademco
objects to such utilization Lifeline shall reimburse Ademco for all its
additional costs resulting from such utilization (including without limitation
additional inspection, freight and component costs and costs associated with
changing Ademco's manufacturing process(es) or with increased scrap). A change
in, or direction of, a subcontractor or other vendor pursuant to this Section
2(c) shall not affect Lifeline's obligations with respect to any Product or
component therefor manufactured or obtained by Ademco prior to the effectiveness
of such change or direction. In the event a change or direction related to a
Product results in Lifeline ceasing to have requirements for the Product in its
form prior thereto, Lifeline shall promptly purchase from Ademco all of Ademco's
then inventory of such Product in such form and components therefor, in each
case other than any such inventory for which Ademco is at risk pursuant to
Section 3(c).
- 2 -
<PAGE>
(d) Ademco agrees to provide Lifeline, in a reasonably prompt
manner, with the following services: (i) technical support and design services
for printed circuit board layouts, (ii) design of production test methods,
fixtures and procedures, (iii) mechanical design of production tooling,
including tooling for molded plastic parts, (iv) procurement and supervision of
the fabrication of production tooling and (v) submission, management and
oversight of testing for all regulatory and safety approvals specified by
Lifeline pursuant to Section 11(a), all as reasonably required by Lifeline from
time to time. Ademco's engineering resources will also assist Lifeline in
resolving any issues that arise during a Product's qualification process.
Lifeline will reimburse Ademco for its reasonable out-of-pocket costs in
providing such services, other than costs for its internal usage of facilities,
equipment or labor.
(e) Ademco agrees to fabricate for Lifeline, in a reasonably prompt
manner, all circuit assemblies, feasibility models and prototypes for, and pilot
quantities of, enhancements to or derivatives of existing Products being
considered from time to time by Lifeline as well as products being considered
from time to time by Lifeline for proposal as Future Products pursuant to
Section 2(a), provided that the number of such latter products shall not at any
time exceed five, and provided further that the foregoing is subject to Ademco's
right to decline to add different products as provided in Section 2(a). Ademco's
related costs of components, subcontractor or vendor setup charges, prototype
tooling and fixtures and, in the case of such latter products, non-overhead
related direct costs, including but not limited to actual, direct labor, will be
paid by Lifeline. In the case of such a latter product that becomes a Future
Product, such costs shall be deemed to be a manufacturing cost which shall be
included in the calculation of the price paid by Lifeline to Ademco for such
Future Product. In each other case, such costs shall be paid to Ademco by
Lifeline upon demand.
(f) Ademco will work cooperatively with Lifeline on initiatives that
focus on cost reductions to and performance and reliability improvements of the
Products. During the product design process, Ademco's engineering personnel will
review design approaches with Lifeline's engineering personnel and recommend any
changes or implementations that Ademco's engineering personnel believe will
improve production yields, reduce product cost or improve reliability.
(g) Ademco acknowledges that nothing in this Agreement shall give
Ademco any rights in any Product or Product feature or the design thereof, or in
any intellectual property rights therein, or in any regulatory approval or grant
for any Product (including listing, certification, registration or other), or in
any patent, trademark, trade dress or name of Lifeline used by Ademco in
implementing the labeling and packaging thereof or otherwise. Without limiting
the foregoing, Ademco acknowledges the importance to Lifeline of its proprietary
information and of Lifeline's need to share information with Ademco about
prospective Future Products and enhancements, including in the early stages of
development of those Products or enhancements. Accordingly, in order to enable
Lifeline to protect its intellectual property rights, and to avoid the
inadvertent disclosure or misuse of Lifeline's proprietary information, Ademco
agrees that during the term of this Agreement and for a period of five years
thereafter, (i) it shall not offer or provide, directly or indirectly, personal
emergency response monitoring services (except on an interim basis in connection
with loan defaults by dealers); (ii) neither it nor Ademco Distribution, Inc.
shall knowingly sell personal emergency response products directly to end users,
hospitals, assisted living facilities or health care agencies or to distributors
primarily
- 3 -
<PAGE>
engaged in sales of health care products; and (iii) it shall not design for any
third party (including without limitation any affiliate or other division of
Pittway) personal emergency response products that include any feature that it
and Lifeline agree in writing (such agreement not to be unreasonably withheld)
constitutes a unique feature of Lifeline products (in relation to personal
emergency response products generally).
3. Scheduling/Shipment.
(a) Simultaneously with the execution and delivery of this
Agreement, Lifeline is delivering to Ademco a schedule of Lifeline's anticipated
requirements for each Initial Product for each of the twelve consecutive months
beginning with December 1999, including with respect to December 1999 the
respective anticipated delivery dates, destinations and standard configurations
for such requirements. The requirements, delivery dates, destinations and
standard configurations set forth therein for December 1999 constitute
non-cancelable orders by Lifeline which have been accepted by Ademco.
(b) No later than the fifteenth (15th) day of December 1999 and of
each succeeding month, Lifeline shall deliver to Ademco a schedule of Lifeline's
anticipated requirements for each Product for each of the succeeding twelve
consecutive months, including with respect to the first such month the
respective anticipated delivery dates, destinations and standard configurations
for such requirements. Upon delivery of each such schedule to Ademco, the
requirements, delivery dates, destinations and standard configurations set forth
therein for the first month covered by such schedule shall constitute
non-cancelable orders by Lifeline. Such non-cancelable orders shall be accepted
by Ademco to the extent the quantity of each Product covered by such orders does
not exceed the sum of (i) Lifeline's anticipated requirements for such Product
for such first month set forth in the schedule delivered by Lifeline pursuant to
this Section 3 during the fourth month preceding such first month (or, if such
first month is prior to April of 2000, in the schedule delivered by Lifeline
pursuant to (a) above) and (ii) the safety stock inventory of such Product on
hand at Ademco at the time of delivery of such orders. Ademco may accept, but
shall not be required to accept, some or all of the non-cancelable orders for
any excess.
(c) Ademco shall manufacture Products, and manufacture or obtain
spare parts, to meet Lifeline's anticipated requirements for the succeeding
three months. In addition, Ademco shall build as promptly as practicable, and
thereafter for the Term shall use commercially reasonable efforts to maintain,
in each case consistent with fulfilling non-cancelable orders for Products that
Ademco has accepted, a safety stock inventory of finished Product and components
therefor that for each Product is between the minimum and maximum safety stock
levels then applicable to such Product. The initial minimum and maximum safety
stock levels for each Initial Product are set forth on Exhibit A. Lifeline may
adjust such levels from time to time during the months of December 1999, January
2000 and February 2000, but the aggregate increase in any such initial level
resulting from such adjustments may not exceed 10% of such initial level. For
each calendar month subsequent to February 2000, the maximum and minimum levels
for an Initial Product shall be as specified by Lifeline but in no event greater
than 125% of the averages of the minimum and maximum levels for such Initial
Product during the preceding three calendar months, respectively. The maximum
and minimum safety stock levels for each Future Product for the first three
months it is a Product
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shall be established by the parties at the time such Future Product becomes a
Product, and thereafter shall be determined in a manner corresponding to that
applicable to an Initial Product. Ademco will at Lifeline's request provide
Lifeline with access to information regarding the safety stock levels on hand
from time to time. Any Ademco inventory of any Product or component in excess of
that manufactured and/or obtained by Ademco as contemplated in this Section 3(c)
shall be at Ademco's risk in the event of the termination of this Agreement or a
change (including without limitation a change resulting from an engineering
change pursuant to Section 10(a)) in Lifeline's anticipated requirements for
which orders have not been accepted at the time of such change.
(d) Ademco shall ship Products for which orders are accepted
pursuant to (a) or (b) above on shipment dates reasonably anticipated to result
in deliveries within one day (plus or minus) of the delivery dates designated by
Lifeline therefor. All freight costs shall be borne by Lifeline; provided,
however, that Ademco shall bear the cost of any incremental shipping and related
charges incurred in order to expedite late deliveries by Ademco.
(e) All shipments shall be by common carrier designated by Lifeline,
FOB Syosset, New York or El Paso, Texas, directed to such Lifeline facilities as
are specified by Lifeline. Risk of loss of Products so shipped shall pass to
Lifeline upon Ademco's delivery thereof to the common carrier. Ademco shall
insure such shipments, at Lifeline's expense, as reasonably required from time
to time by Lifeline.
4. Pricing.
(a) Subject to the succeeding provisions of this Section 4, the per
unit prices (FOB Syosset, New York or El Paso, Texas) payable by Lifeline for
Products shipped during the Term (i) for each Initial Product, shall be the
price for such Initial Product set forth on Exhibit D attached hereto, and (ii)
for each Future Product shall be set so as to give Ademco a twenty-four percent
(24%) gross margin with respect to such Future Product, as negotiated in good
faith by Lifeline and Ademco at the time such Future Product is set forth on
Exhibit A.
(b) For orders accepted by Ademco in any year ended on an
anniversary of the date hereof, the per unit price set forth on Exhibit D for
each of the Initial Products which is not a pendant or personal help button is
premised on Lifeline's placing orders during such year for at least 85% of the
aggregate of the minimum yearly numbers of such Products set forth on Exhibit D.
For orders accepted by Ademco in any year ended on an anniversary of the date
hereof, the per unit price set forth on Exhibit D for each of the Initial
Products which is a pendant or personal help button is premised on Lifeline's
placing orders during such year for at least eighty-five percent (85%) of the
aggregate of the minimum yearly number of such Products set forth on Exhibit D.
For purposes of calculating the total number of units of a Product for which
orders have been accepted in any such year, orders accepted for all enhanced
forms of such Product shall be included in the total for such Product. In the
event the premise set forth in this Section 4(b) underlying the price for orders
of a particular Product accepted by Ademco during any such year is not satisfied
(other than as a result of the termination of this Agreement (i) by Ademco
pursuant to Section 1(i) or (ii) by Lifeline pursuant to Section 13 or 17(b)),
the parties shall promptly negotiate in good faith a retroactive increase in
such price for such orders and Lifeline shall promptly thereafter pay the
increase to Ademco.
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(c) The per unit price for each Initial Product payable by Lifeline
to Ademco as set forth on Exhibit D shall be reduced by 50% of any net reduction
in the cost of labor, material or overhead involved in its manufacture that is
realized by Ademco in such manufacture. The per unit price for each Future
Product payable by Lifeline to Ademco as set pursuant to (a) above shall be
reduced by 50% of any net increase above 24% in the gross margin with respect to
such Future Product achieved by Ademco on account of any reduction in the cost
of labor, material or overhead involved in its manufacture that is realized by
Ademco in such manufacture.
(d) Following the second anniversary of the date hereof, the per
unit price payable by Lifeline for any Initial Product shall be increased, on a
full pass-through basis, to reflect any net increase in Ademco's delivered
out-of-pocket cost (for a given volume of purchases) for any components or other
materials used in manufacture thereof above the base cost therefor set forth on
Exhibit E; provided that Ademco provides Lifeline with reasonable prior written
notice and evidence supporting such cost increases.
(e) Prices for the Products are also subject to increase as provided
in Sections 10 and 11.
(f) Shipments shall be invoiced by Ademco no earlier than when such
shipments are made. Payment of each invoice shall be due in full at Ademco
within 30 days after the Products covered by the shipment are received by
Lifeline. Amounts not paid when due shall bear interest at the rate of twelve
percent (12%) per annum (or, if less, the maximum rate permitted by law) from
the due date until paid. There shall be no discount for early payment.
5. Equipment and Tooling/Spare Parts.
(a) Promptly following the execution and delivery of this Agreement,
Lifeline and Ademco (i) shall review Lifeline's testing equipment that is unique
to the Initial Products and Lifeline shall identify any of such testing
equipment that exceeds Lifeline's needs for its own testing of Products and (ii)
shall review Lifeline's tooling and molds that are unique to the Initial
Products (whether located at Lifeline or one of its suppliers) and Lifeline
shall identify any of such tooling and molds that exceed Lifeline's needs for a
reserve for its own potential rework of Products. Within 10 days after Ademco's
request therefor, Lifeline shall deliver or cause to be delivered to such Ademco
facility as Ademco may direct all testing equipment, tooling and molds so
identified that are desired by Ademco. Title to such testing equipment, tooling
and molds, free and clear of all liens or other encumbrances other than the
provisions of (c) below, shall pass to Ademco upon such delivery. Ademco shall
be responsible for the cost of all such transportation. In addition, by written
notice given by Ademco to Lifeline within twenty (20) days after the date of
this Agreement, Ademco shall have the right to purchase the surface mount and
wave soldering equipment used by Lifeline in connection with the manufacture of
the Initial Products, at a price, payable in cash, equal to the fair market
value thereof, as agreed to in good faith by Lifeline and Ademco. Any such
equipment which Ademco elects to purchase shall be delivered, and the cost of
such delivery shall be borne, in the same manner as provided above with regard
to testing equipment.
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(b) To the extent that, consistent with Ademco's customary
manufacturing and testing practices or otherwise necessary for Ademco to meet
its obligations under this Agreement, Ademco reasonably requires additional
testing equipment, tooling or molds which are unique to any Products, Ademco
shall obtain or produce the same. To the extent that, consistent with Lifeline's
customary testing practices, Lifeline reasonably requires testing equipment for
its own internal testing of Products supplied to it by Ademco hereunder, Ademco
shall, following at least 60 days' prior written request from Lifeline, obtain
or produce the same. In the case of testing equipment, tooling or molds for an
Initial Product, the expense therefor shall be incurred by Ademco for its own
account. In the case of testing equipment, tooling or molds for a Future
Product, the expense therefor shall be initially incurred by Ademco, but such
expense shall be deemed to be a manufacturing cost which shall be included in
the calculation of the price paid by Lifeline to Ademco for such Future Product,
assuming that such cost is amortized over the expected sales of such Future
Product during a period agreed upon by the parties, not to exceed three years.
In the event this Agreement terminates or a Future Product is discontinued
before the costs of such testing equipment, tooling and molds are fully
amortized, Lifeline will be liable for (i) in the event of a termination of this
Agreement, the remaining balance of all unamortized costs, or (ii) in the event
of the discontinuance of a Future Product, the remaining balance of the
unamortized cost relative to such Future Product. Notwithstanding the foregoing,
in no event shall Ademco be required to incur expense pursuant to this Section
5(b) with respect to Future Products if the sum of such expense and any
unamortized balance of costs previously so incurred exceed $250,000 (provided
that in any such event, Lifeline may incur a portion of such expense directly to
reduce the portion to be incurred by Ademco).
(c) Ademco shall use such care with respect to the testing
equipment, tooling and molds delivered by Lifeline pursuant to Section 5(a) or
for which Lifeline ultimately bears the expense pursuant to Section 5(b) as it
uses with respect to its other testing equipment, tooling and molds of similar
kinds, and shall be responsible for the normal maintenance and repair thereof.
Ademco may from time to time dispose of any or all of the same as it becomes
worn out or obsolete, after 90 days' prior written notice to Lifeline of
Ademco's intent to do so, unless Lifeline requests that any such equipment,
tooling and/or molds be delivered to it. Ademco shall promptly transfer to
Lifeline title and possession to all such testing equipment, tooling and molds
and any replacements thereof not so disposed of, free and clear of all liens or
other encumbrances, (i) relating to any Initial Product, upon the termination of
this Agreement or upon the discontinuation of such Initial Product, as
applicable, and (ii) relating to any Future Project, upon the termination of
this Agreement or upon the discontinuation of such Future Product, as
applicable, and the payment by Lifeline of the unamortized costs of the testing
equipment, tooling and molds, if any. Each such transfer shall be on an "as is,
where is" basis. Within 10 days after the relevant event, Ademco shall deliver
or cause to be delivered to such Lifeline facility as Lifeline may direct the
testing equipment, tooling and molds to which such event relates. Lifeline shall
be responsible for the cost of such transportation.
(d) Except as expressly set forth above, Ademco shall maintain and
adapt as necessary, at its own cost, the equipment and other materials,
including testing equipment, tooling and molds, required to fulfill its
manufacturing and testing obligations under this Agreement. The foregoing shall
include the rework of tooling to adapt to Ademco's (or its suppliers')
equipment, the testing of tooling in its new environment and the certification
or recertification of tooling at its location of use.
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(e) Ademco agrees at its expense to design, document, construct,
maintain and verify all test, assembly and calibration fixtures and procedures
that are required by it for the construction and testing of all Product
assemblies, final assemblies and component parts. Lifeline will make available
to Ademco all documentation and know-how owned by it or which it is otherwise
permitted to share with Ademco regarding Lifeline's current test fixtures and
procedures.
(f) In order to promote correlation of final assembly test
processes, Ademco shall construct, deliver and maintain at Lifeline's principal
executive office a duplicate set of final test fixtures, software and procedures
which may be used by Lifeline for acceptance testing. All costs incurred by
Ademco in connection therewith shall be borne by Ademco, except that all such
costs related to any Future Product (with internal construction labor deemed to
cost $30 per hour) shall be included in the calculation of the price paid by
Lifeline to Ademco for such Future Product assuming such cost is amortized over
the expected sales of such Future Product during a period agreed upon by the
parties, not to exceed three years. In the event this Agreement terminates or a
Future Product is discontinued before all such costs are amortized, Lifeline
will be liable to Ademco for the remaining balance of (i) all such costs which
have not then been amortized, in the event of a termination of this Agreement,
or (ii) in the event of discontinuance of a Future Product, such costs with
respect to such Future Product which have not been amortized. The test software
and procedures delivered to Lifeline shall be the sole and exclusive property of
Ademco and of a confidential nature, and Lifeline shall use such software and
procedures, and shall not disclose any of them to any third party, on the same
basis that Ademco agrees in Section 6(b) to use and not disclose the know-how
provided to Ademco by Lifeline; provided, however, that upon the termination of
this Agreement or the discontinuation of a Future Product, title to the test
fixtures, software and procedures shall be transferred to Lifeline. Ademco also
agrees to supply to Lifeline from time to time, for the cost of purchased and
custom fabricated parts, any and all fixtures requested by Lifeline that are
required to sustain Lifeline's repair and rework activities related to Products.
(g) To the extent on hand and not required by Ademco for the
performance of its obligations under this Agreement, Ademco agrees to sell
Lifeline such spare parts for the Products as Lifeline may request from time to
time. Ademco also agrees to order for sale to Lifeline such additional spare
parts for the Products as Lifeline may request from time to time. Ademco agrees
to pass through to Lifeline to the extent permitted by Ademco's suppliers of
such spare parts any warranties thereon by such suppliers. Ademco agrees to
price such spare parts at prices equal to Ademco's costs therefor. Ademco agrees
to provide to Lifeline from time to time upon Lifeline's request a summary of
the then current costs to it of all component parts of Products, as well as of
all additional parts then being used by Ademco in its manufacturing of Products.
The cost information provided to Lifeline by Ademco shall be the sole and
exclusive property of Ademco and of a confidential nature, and Lifeline shall
use such information, and shall not disclose any of such information to any
third party, on the same basis that Ademco agrees in Section 6(b) to use and not
disclose the know-how provided to Ademco by Lifeline. SALES OF SPARE PARTS
PURSUANT TO THIS SECTION 5(g) SHALL BE WITHOUT WARRANTY FROM ADEMCO OF ANY KIND,
EXPRESS OR IMPLIED, INCLUDING THOSE OF MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE AND NON-INFRINGEMENT.
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6. Know-how.
(a) Lifeline shall promptly disclose to Ademco all of the know-how
owned by or licensed to Lifeline that is currently used by Lifeline or its
suppliers in the manufacture of the Initial Products and that is necessary for
Ademco to perform its responsibilities under this Agreement.
(b) The know-how provided to Ademco by Lifeline pursuant to this
Agreement shall be the sole and exclusive property of Lifeline and of a
confidential nature, and Ademco shall use such know-how solely in connection
with this Agreement and shall not disclose any of such know-how to any third
party other than a subcontractor or other vendor approved in writing by Lifeline
(including without limitation any affiliate or other division of Pittway)
without the prior written consent of Lifeline. The foregoing shall not, however,
apply to any such know-how that: (i) is already known to Ademco at the time it
is provided to Ademco by Lifeline (other than pursuant to an obligation of
confidentiality to Lifeline or as a result of Ademco's breach of any legal
obligation to Lifeline); (ii) is at such time generally known to and available
for use by the public, or thereafter becomes generally known to and available
for use by the public other than as a result of Ademco's acts or omission to
act; (iii) is received by Ademco from a third party having the legal right to
disclose such know-how; or (iv) is required by order of a court of competent
jurisdiction (by subpoena or similar process) to be disclosed by Ademco
(provided that in such case Ademco shall promptly inform Lifeline of such order,
shall cooperate with Lifeline, at Lifeline's expense, in attempting to obtain a
protective order or to otherwise restrict such disclosure, and shall only
disclose such know-how to the extent necessary to comply with such court order).
7. Right to Reject; Limited Warranty.
(a) Ademco warrants to Lifeline that each Product shipped pursuant
to this Agreement, when delivered to the common carrier at the FOB point, shall
be free of defects in material and workmanship and shall conform to the
Specifications applicable to it. Lifeline shall have the right to inspect the
Products prior to acceptance thereof and shall reject and return any Products
that are found by it not to comply with the foregoing warranty. Ademco shall
bear the cost of such return. Such rejection and return shall be Lifeline's sole
remedy with respect to Products so found not to comply with the foregoing
warranty.
(b) Ademco further warrants to Lifeline that during the period
covered by Lifeline's warranty to its customer or to any end user with respect
to each Product (but in no event more than 27 months following Ademco's shipment
of such Product to Lifeline), such Product shall not suffer any component
failure (other than any such failure related to lightning). In the event of a
breach of the foregoing warranty, Lifeline shall promptly notify Ademco thereof
and provide Ademco with a reasonable opportunity to elect to repair or rework
such Product at Ademco's expense (in which event Lifeline will ship such Product
to Ademco for repair or rework at Ademco's expense). In the event Ademco
declines such opportunity, Lifeline may then elect to repair or rework such
Product on its own premises or elsewhere, with the cost of related labor (at
Lifeline's then current repair rates; but not to exceed $25.00 per unit),
materials and any related shipping charges to be borne by Ademco. It is
expressly understood and agreed that Ademco's warranty under this Section 7(b)
shall not apply to any Product repaired or
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reworked by Lifeline, to the extent that a failure of such Product to comply
with such warranty is caused by any such repair or rework. Lifeline may offset
any amounts due to it by Ademco under this Section 7(b) against any amounts due
by it to Ademco under this Agreement.
(c) During the Term, Ademco agrees, if Lifeline requests from time
to time, to perform repair or refurbishment of (i) Products shipped by Ademco
pursuant to this Agreement to which Ademco's warranty under (a) or (b) above
does not apply and (ii) Products manufactured by Lifeline which were not shipped
by Ademco. The price for each such repair or refurbishment shall not exceed
$25.00 plus related parts charges. All related inbound and outbound freight
shall be the responsibility of Lifeline.
(d) Ademco represents to Lifeline that all of Ademco's internal
systems used in its business or operations, including, without limitation,
computer hardware systems, software applications, firmware, equipment containing
embedded microchips and other embedded systems are Year 2000 Compliant and will
not be adversely affected with respect to functionality, interoperability,
performance or volume capacity by virtue of the arrival of the year 2000, except
to the extent that Ademco's ability to perform its obligations under this
Agreement would not be materially adversely affected. Ademco is not aware of any
failure to be Year 2000 Compliant of any third-party system used in connection
with the business or operations of Ademco, including without limitation any
system belonging to any of Ademco's suppliers, service providers or customers,
which would materially adversely affect Ademco's ability to perform its
obligations under this Agreement. For purposes of this Agreement, "Year 2000
Compliant" means that the applicable system or item:
(1) will accurately receive, record, store, provide, recognize
and process all date and time data from, during, into and between the twentieth
and twenty-first centuries, the years 1999 and 2000 and all leap years;
(2) will accurately perform all date-dependent calculations
and operations (including, without limitation, mathematical operations, sorting,
comparing and reporting) from, during, into and between the twentieth and
twenty-first centuries, the years 1999 and 2000 and all leap years; and
(3) will not malfunction, cease to function or provide invalid
or incorrect results as a result of (x) the change of years from 1999 to 2000 or
from 2000 to 2001, (y) date data, including date data which represents or
references different centuries, different dates during 1999 and 2000, or more
than one century or (z) the occurrence of any particular date,
in each case without human intervention, other than original data entry;
provided, in each case, that all applications, hardware and other systems used
in conjunction with such system or item which are not owned or licensed by
Ademco correctly exchange date data with or provide data to such system or item.
(e) THE EXPRESS WARRANTIES SET FORTH IN SECTIONS 7(a) AND (b) AND IN
SECTION 8(a) ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR
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IMPLIED, INCLUDING THOSE OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE
AND NONINFRINGEMENT.
8. Quality Control/Testing/Record Keeping.
(a) Ademco warrants to Lifeline that each Product shipped by it
pursuant to this Agreement shall be of a quality at least equal to the quality
of any comparable product currently sold by Lifeline. Lifeline shall have the
right, at its own expense, upon reasonable advance notice to Ademco and with
minimum disruption to Ademco's (or its suppliers') operations, to inspect the
facilities, equipment and operations of Ademco (and its suppliers) related to
Ademco's manufacture of Products for the purpose of determining whether Ademco
is in compliance with the foregoing agreement.
(b) Prior to shipment to Lifeline, each Product shall be tested by
Ademco for conformity to the applicable Specifications, in accordance with the
test plan set forth on Exhibit F hereto (which shall be amended as necessary in
connection with the addition of Future Products). Ademco shall maintain the
records of the results of such testing for seven (7) years after shipment, and
shall provide Lifeline with copies of such records, at Lifeline's expense, upon
Lifeline's request.
(c) With respect to each Product shipped pursuant to this Agreement,
Ademco shall maintain for seven (7) years after shipment written records of (i)
any changes in the Specifications therefor approved by Lifeline, (ii) the
component receipt history, (iii) the shipment history by product line and serial
number, (iv) engineering change order implementation history and (v) any
documentation relating to such Product reasonably required to demonstrate its
quality and manufacturing practices. In addition, Ademco shall create and
maintain formally-controlled documentation which would enable Lifeline or a
third party to manufacture and test the Products in the event of the termination
of this Agreement, in each case assuming possession of the requisite
manufacturing skills and resources. Such formally-controlled documentation shall
relate, among other things, to test fixturing, manufacturing and process-related
fixturing, Product manufacturing processes and test procedures and strategies
and shall include copies of all testing software. Ademco will provide a copy of
the foregoing to Lifeline (i) upon Lifeline's request from time to time during
the Term, at Lifeline's expense and (ii) upon Lifeline's request at the
expiration of the Term, at Ademco's expense.
(d) Notwithstanding the provisions of (b) and (c) above, at any time
after the Term Ademco may destroy any or all the records required to be
mentioned by it pursuant thereto if it gives Lifeline at least ninety (90) days
advance written notice of its intention to do so and a reasonable opportunity to
take possession of the records intended to be destroyed.
9. Cooperation. Ademco shall cooperate with Lifeline in Lifeline's
investigation of any issues that may arise related to Product quality and/or
customer dissatisfaction with Products. Lifeline will bring each such issue to
Ademco's attention upon becoming aware of it.
10. Enhancements or Other Engineering Changes.
(a) Lifeline may from time to time direct in writing that Ademco
implement a specific enhancement or other engineering change related to a
Product. Such an enhancement or
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other change may consist of, among other things, a substitution of a component
or a revision to a printed circuit board layout, or a modification to tooling
for injection-molded parts. Ademco may decline to make any such enhancement or
other change if the Product as so enhanced or changed is one that Ademco could
decline to add to Exhibit A (other than on the basis of the numerical limitation
applicable to Future Products) if it were being proposed as a Future Product.
(b) If the enhancement or other change results in an increase in
manufacturing cost, Lifeline shall bear any incremental material and labor costs
incurred by Ademco (as supported by evidence satisfactory to Lifeline in its
reasonable judgment) in connection with the manufacturing of the revised Product
as well as any resulting costs incurred by Ademco to modify fixtures and
tooling. Ademco shall bear any other costs of implementation, including without
limitation the costs of changes to Ademco's product documentation, process
sheets and manufacturing engineering support documentation and the cost of
changes to test processes, procedures or software. All such costs to be borne by
Lifeline shall be reflected in an increase in the price of the affected Product
which shall amortize such costs over the expected sales of such Product during a
period agreed upon by the parties, not to exceed three years. In the event this
Agreement terminates or a Product is discontinued before all such costs are
fully amortized, Lifeline will be liable to Ademco for the remaining balance of
(i) all costs to be borne by Lifeline pursuant to this Section 10 which have not
then been amortized, in the event of a termination of this Agreement, or (ii) in
the event of the discontinuance of a Product, the costs to be borne by Lifeline
pursuant to this Section 10 with respect to such Product which have not then
been amortized.
(c) Costs related to enhancements or other changes which would
reduce the cost of manufacturing any Product are governed by Section 4(c) above.
(d) Any enhancement or other change directed by Lifeline and not
declined by Ademco pursuant to Section 10(a) shall be implemented by Ademco as
soon thereafter as practicable or, if later, by a date specified by Lifeline in
its direction. Upon receipt of any such direction not so declined, Ademco (i)
shall provide Lifeline in writing with Ademco's estimate of any related costs to
be borne by Lifeline and the amortization thereof and (ii) shall review Ademco's
inventory of the affected Product and components therefor and advise Lifeline in
writing of Ademco's estimate of the quantity of such inventory (other than any
such inventory for which Ademco is at risk pursuant to Section 3(c)) that will
be rendered excess or obsolete as a result of the directed enhancement or other
change; and Lifeline may then withdraw its direction. If Lifeline does not
withdraw its direction in writing within ten (10) days after its receipt of such
advice, Ademco shall proceed with the implementation of the directed enhancement
or other change and, upon the implementation of such enhancement or other
change, the Specifications shall be deemed modified to reflect such enhancement
or other change (and such enhancement or other change shall be treated as having
been expressly agreed to in writing by Lifeline and Lifeline shall, subject to
Section 3(c) above, purchase from Ademco, at Ademco's cost, all then remaining
inventory that has been rendered excess or obsolete as a result of such
enhancement or other change).
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11. Legal and Regulatory Compliance.
(a) Lifeline shall be responsible for determining the legal and
regulatory requirements applicable to Products (including without limitation the
requirements applicable to Products exported to countries outside the U.S.) and
for keeping Ademco advised thereof in detail (including reasonably in advance of
the effective time of any change therein), and for keeping the Specifications in
compliance with such requirements (including without limitation assuring that
the standard configurations for Products meet such requirements). Ademco shall
not withhold or unreasonably delay its consent to any modification of the
Specifications proposed by Lifeline that is necessary to keep the Specifications
in compliance with such requirements. In the event any change in such
requirements results, in effect, in the discontinuance of any Product or
component therefor, Lifeline shall, subject to Section 3(c) above, purchase from
Ademco, at Ademco's cost, all then remaining inventory of such Product or
component.
(b) Ademco shall submit on behalf of Lifeline applications for such
regulatory approvals as are specified by Lifeline relating to the manufacture
and marketing of the Products, including without limitation approvals required
for electrical safety; electromagnetic compatibility, network interconnection
and medical safety; and shall maintain any such approvals that result. Such
activities shall be at Ademco's expense, provided that (i) costs incurred by
Ademco in connection with any regulatory approval (or application therefor) for
an Initial Product of a kind which such Initial Product does not currently have
or of a kind which such Initial Product currently has but in a country in which
it does not currently have the same shall be reimbursed to Ademco by Lifeline
upon Ademco's request and (ii) costs incurred by Ademco in connection with any
Future Product shall (x) in the case of an approval obtained, be deemed to be a
manufacturing cost which shall be included in the calculation of the price paid
by Lifeline to Ademco for such Product, assuming that such costs are amortized
over the expected sales of such Product during the period of the approval
obtained, and (y) in each other case, be reimbursed to Ademco by Lifeline upon
demand. In the event this Agreement terminates or a Future Product is
discontinued before all costs to be amortized pursuant to (x) above are fully
amortized, Lifeline will be liable to Ademco for the remaining balance of (i)
all such costs which have not then been amortized, in the event of a termination
of this Agreement, or (ii) in the event of discontinuance of a Future Product,
such costs with respect to such Future Product which have not been amortized.
All regulatory approvals obtained by Ademco pursuant to this Section shall be
obtained in the name of Lifeline, and Ademco shall provide Lifeline with copies
of all such approvals promptly upon Ademco's receipt thereof. Ademco shall
maintain all technical files and adhere to all quality assurance practices and
procedures required for the Products shipped by it to be covered by the
applicable regulatory approvals obtained. In the event a Product fails to
receive the necessary approval, Ademco shall promptly provide Lifeline with
copies of any notices or other written information relating to such failure.
(c) At Lifeline's request, Ademco shall, at its expense, perform
such specific tests on Products as are identified to Ademco by Lifeline as
necessary for their regulatory compliance and shall submit the results of such
tests to such regulatory bodies as are identified by Lifeline for such purpose.
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<PAGE>
12. Indemnification.
(a) Lifeline shall indemnify, defend and hold harmless Ademco,
Pittway and their affiliates, and the respective successors, assigns, directors,
officers, agents, representatives and employees of each of them, with respect to
all claims (including without limitation claims for personal injury, wrongful
death or damage to property), liabilities, damages, losses and expenses,
including without limitation costs of investigation and reasonable attorneys'
fees (collectively, "Losses"), arising out of or in connection with the Products
or the sale, installation or use thereof or the monitoring (or failure of
monitoring) thereof; provided that Lifeline's obligation under this Section
shall not limit Ademco's indemnity obligation under paragraph (c) below and
Lifeline's obligation under this Section shall not include claims for which
Ademco is obligated to indemnify Lifeline or any other person pursuant to
paragraph (c) below. The Losses for which Lifeline is responsible under this
Section shall include, without limitation, Losses attributable to any Product
manufactured or shipped pursuant to this Agreement (or to the manufacture,
labeling or packaging thereof) infringing, or being alleged to infringe, any
patent, trademark, trade dress or other intellectual property of any third
party, other than an infringement or alleged infringement arising from the
manufacturing process used by Ademco to manufacture the Products, and except to
the extent such Losses arise from any breach by Ademco of its express warranties
under this Agreement. Lifeline's indemnification obligation under this Section
12(a) shall be Ademco's sole remedy with respect to the matters covered thereby.
(b) At Lifeline's insistence, Ademco has agreed that there will be
omitted from the Products, and from the packaging and other materials
accompanying the Products, language set forth on Exhibit G identifying
Ademco/Pittway as the manufacturer thereof (to the extent permitted by law) and
purporting to limit their liability to purchasers and end users of the Products
to the warranty obligations set forth in Section 7(b). Lifeline shall indemnify,
defend and hold harmless Ademco, Pittway and their affiliates, and the
respective successors, assigns, directors, officers, agents representatives and
employees of each of them, with respect to all Losses which they could have
avoided had such language not been omitted.
(c) Ademco shall indemnify, defend and hold harmless Lifeline and
its affiliates, and the respective successors, assigns, directors, officers,
agents, representatives and employees of each of them, with respect to all
Losses arising out of or in connection with (i) claims for personal injury,
wrongful death or property damage caused by any failure of a product shipped by
Ademco pursuant to this Agreement to comply with Ademco's express warranties in
this Agreement applicable to such Product (other than any such claims Ademco's
liability for which could have been avoided had the language described in
paragraph (b) above not been omitted), or (ii) intellectual property
infringement claims by third parties arising (A) from the manufacturing process
used by Ademco to manufacture the Products or (B) from the failure of the
Product to comply with all express warranties of Ademco under this Agreement.
Ademco's warranty obligations under Section 7(a) and (b) and 8(a) above, and its
indemnification obligation under clause (i) of the preceding sentence, shall be
Lifeline's sole remedy with respect to the matters covered thereby.
(d) Except as provided in the last sentences of paragraphs (a) and
(c) above, nothing in this Section 12 shall limit either party's remedies
against the other party.
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<PAGE>
(e) The indemnified party (be it Ademco or any of the other parties
named under paragraphs 12(a) and (b) above or Lifeline or any of the other
parties named under paragraph 12(c) above) hereby agrees that: (i) the
indemnifying party shall have sole control and authority with respect to the
defense or settlement of any claim for which the indemnifying party is
responsible; and (ii) the indemnified party shall cooperate fully with the
indemnifying party, at the indemnifying party's sole cost and expense, in the
defense of any such claim. Any settlement of any such claim that imposes any
liability or limitation on the indemnified party shall not be entered into
without the prior written consent of the indemnified party. In the event that a
claim is based partially on an indemnified claim and partially on an
unindemnified claim, or is based partially on a claim indemnified by Lifeline
pursuant hereto and partially on a claim indemnified by Ademco pursuant hereto,
any Losses incurred in connection with such claims shall be apportioned between
the parties in accordance with the degree of cause attributable to each party.
(f) At all times during the Term and the three (3) years after the
Term, Lifeline and Ademco shall each maintain liability and other insurance
coverage with respect to the Products and the monitoring thereof (in the case of
Lifeline), and the Products and the manufacturing thereof (in the case of
Ademco), in amounts set forth on Exhibit H hereto and with carriers reasonably
satisfactory to the other party. The policies evidencing such insurance shall
name Ademco, Pittway and their affiliates (in the case of policies to be
obtained by Lifeline) and Lifeline and its affiliates (in the case of policies
to be obtained by Ademco) as additional insureds as their interests may appear
and shall provide that such policies may not be modified or canceled prior to
scheduled expiration without 30 days' prior notice to the other party. Each
party shall provide the other party with copies of all such policies it obtains.
13. Termination.
(a) Either party may terminate this Agreement by written notice to
the other party if the other party breaches this Agreement in any material
respect and does not correct such breach within sixty (60) days after receipt of
written notice thereof from such party specifying such breach; provided,
however, that Ademco shall not be liable for, and Lifeline shall have no right
to terminate this Agreement for, a breach of this Agreement caused by the
actions of a subcontractor or other vendor that Lifeline has directed Ademco to
use to which Ademco objected in writing to Lifeline prior to Ademco's first
utilization of such subcontractor or other vendor subsequent to such direction,
if Ademco's objection was based on reasonable concerns about the quality or
performance of such subcontractor or other vendor. In the event of such a
breach, Ademco and Lifeline will promptly cooperate to address the problems
caused by such subcontractor or other vendor, including, at Lifeline's option,
replacing such subcontractor or other vendor (subject to the provisions of
Section 2(c)).
(b) In the event Lifeline gives notice of termination pursuant to
paragraph (a) above or pursuant to clause (ii) of Section 1, then
notwithstanding the other provisions of this Agreement, Ademco shall have no
obligation with respect to the development or manufacture of any Future Product
not then being purchased from it by Lifeline.
(c) Either party may terminate this Agreement immediately by written
notice to the other party upon the happening of any of the following or any
other comparable event: (1)
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<PAGE>
insolvency of the other party; (2) filing of any petition by or against the
other party under any bankruptcy, reorganization or receivership law which is
not discharged within 60 days after the filing thereof; (3) execution of an
assignment for the benefit of the other party's creditors; or (4) appointment of
any trustee or receiver for the other party's business or assets or any
substantial part thereof, unless such appointment is withdrawn or nullified
within sixty (60) days of such event.
(d) Neither party shall have any further liability or obligation to
the other following the termination of this Agreement except as follows:
(1) The provisions of the last sentence of Section 4(b), the
last two sentences of Section 5(c), Section 7, the first sentence of Section
8(a), the records retention and copy-providing provisions of Section 8, Sections
9 and 12, this Section 13, Section 14, Section 17(a) and any other provision
which by its express terms is to survive such termination shall survive such
termination.
(2) Each party shall remain liable for any liability or
obligation (including any payment liability or obligation and any limitation on
the use or disclosure of information or other items of a confidential nature)
that has arisen or accrued prior to or upon such termination, including any such
liability or obligation for any breach of this Agreement by such party.
(e) Promptly following termination of this Agreement, Ademco shall
return to Lifeline, or destroy or erase, all tangible or electronically recorded
manifestations of any know-how provided to Ademco by Lifeline pursuant to this
Agreement.
(f) Promptly following termination of this Agreement, Lifeline shall
purchase from Ademco all of Ademco's then inventory of (i) finished Products (at
the then prevailing unit prices therefor) that are then in compliance with the
Specifications and regulatory requirements therefor that were applicable to the
Products at the time that they were manufactured or obtained by Ademco, and (ii)
components for Products (at Ademco's cost therefor, on a FIFO basis), in each
case other than, unless requested by Lifeline in writing, any such inventory for
which Ademco is at risk pursuant to Section 3(c).
14. Limitation of Liability. IN NO EVENT SHALL EITHER ADEMCO OR LIFELINE
BE LIABLE TO THE OTHER UNDER OR ON ACCOUNT OF THIS AGREEMENT (INCLUDING WITHOUT
LIMITATION UNDER SECTION 12 HEREOF) FOR ANY SPECIAL, INCIDENTAL, CONSEQUENTIAL
OR PUNITIVE DAMAGES ARISING OUT OF OR IN CONNECTION WITH ANY ASPECT OF THIS
AGREEMENT OR THE USE OR PERFORMANCE OF ANY PRODUCT, INCLUDING, BUT NOT LIMITED
TO, DAMAGES BASED UPON BREACH OF WARRANTY, BREACH OF CONTRACT, NEGLIGENCE,
STRICT TORT OR ANY OTHER LEGAL THEORY.
15. Independent Contractor. The parties agree that nothing contained in
this Agreement shall create, or shall be deemed or construed to create, any
partnership or joint venture between Ademco and Lifeline and that Ademco shall
at all times during the Term be an independent contractor. Under no
circumstances shall any employee of Ademco be, or be
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<PAGE>
deemed or construed to be, an employee of Lifeline, and Ademco shall be
responsible for the payment of local, state and federal payroll taxes and
contributions for unemployment insurance, worker's compensation, pensions,
social security and related protection with respect to all such employees.
Neither Lifeline nor Ademco shall have the power or authority to act on behalf
of or in the name of the other party or to bind the other party, either directly
or indirectly, except for the purpose of pursuing regulatory approvals under
Section 11, in which case Ademco is authorized to act as Lifeline's agent
subject to the terms and conditions of that Section.
16. Mutual Representations. Each party represents and warrants to the
other that it is free to enter into, and to fully perform, this Agreement and
that no agreement or understanding between it and any other person, firm or
corporation exists that would be breached by its execution, delivery or
performance of this Agreement.
17. Miscellaneous.
(a) Audit Right. Each year, Lifeline shall have the right, at its
own expense, and with minimum disruption to Ademco's operations, to audit
Ademco's relevant books and records in order to verify Ademco's compliance with
the cost-related provisions of this Agreement for the preceding year (or, at
Lifeline's election, if compliance for the second preceding year has not been
audited by Lifeline, then for the two (2) preceding years), provided that
Lifeline exercises such right within six (6) months of the end of such year.
Ademco shall promptly (i) pay to Lifeline any overcharge and (ii) in addition,
reimburse Lifeline for any audit expenses incurred by Lifeline which shows that
Ademco has overcharged Lifeline, up to the amount of the overcharge.
(b) Force Majeure. Neither party shall be liable to the other
(including without limitation pursuant to Section 3(d) hereof) for any failure
to perform, or delay in performance, hereunder that results from force majeure
(i.e., acts of god, acts of public enemy, acts of the governments of any state
or political subdivision or any department or regulatory agency thereof or
entity created thereby, quotas, embargoes, subversive activities or sabotage,
fires, floods, explosions, or other catastrophes, epidemics, quarantine
restrictions, or any other cause beyond the control of the non-performing party;
for purposes of which, strikes or other labor stoppages, slowdowns or disputes
shall be deemed beyond the control of the non-performing party); provided,
however, that Ademco shall be required to provide Lifeline with Products
representing no less than Lifeline's pro rata share of Ademco's output from its
manufacturing operations (including products for Ademco's own account) in the
event of force majeure affecting its operations. Upon either party becoming
aware that its obligation to perform will be, or will likely be, excused by
force majeure, such party shall promptly notify the other party and provide an
estimate of the duration of the effect thereof. In the event Ademco is the party
affected by force majeure and the estimated duration of the effect thereof
exceeds one month, Lifeline may terminate this Agreement immediately by written
notice to Ademco. In the event Lifeline does not terminate this Agreement but
instead purchases Products from any other source as a result of such force
majeure, Lifeline's receipts of a Product from such other source during such
period shall be counted toward the minimum yearly number of units of such
Product specified on Exhibit D for the year in which such period occurs. Nothing
in this Agreement shall require Lifeline to utilize Ademco as its sole source of
Products.
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<PAGE>
(c) Assignment. Neither party hereto may assign or transfer this
Agreement, in whole or in part, or any interest arising hereunder, without the
prior written consent of the other party. A change in the ownership or control
(whether by sale of stock, merger, recapitalization or otherwise) of a party or
its direct or indirect parent corporation shall not be deemed an assignment or
transfer for purposes of this Agreement.
(d) Notices. All notices and communications required or permitted to
be given under this Agreement shall be in writing and shall be personally
delivered, sent by telecopy (with receipt confirmed), sent by Federal Express or
other nationally recognized courier requiring signature on receipt, or sent by
certified mail, postage prepaid and return receipt requested, to the parties at
the following addresses (or, in the case of either party, at such other address
as such party may specify by notice to the other):
For Ademco: Alarm Device Manufacturing Company
165 Eileen Way
Syosset, NY 11791
Telephone: (516) 921-6704
Telecopy: (516) 364-5344
Attn: Executive Vice President
For Lifeline: Lifeline Systems, Inc.
111 Lawrence Street
Framingham, MA 01702-8156
Telephone: (508) 988-1000
Telecopy: (508) 988-1386
Attn: Chief Financial Officer
Any such notice or communication shall be deemed delivered when actually
received by the party to whom such notice or communication is given.
(e) Entire Agreement. This Agreement, together with the Exhibits
hereto, constitutes the sole and exclusive agreement for the purchase of
Products by Lifeline from Ademco on or after the date hereof, notwithstanding
any term or condition that may have been or may hereafter be contained in any
proposal, schedule, order, acknowledgment, confirmation, invoice or other
document delivered by either party prior hereto or hereafter in connection
herewith, unless such term or condition is hereafter expressly agreed to by the
other party in a writing which expressly states that such writing constitutes an
amendment to this Agreement. Failure by either party at any time to require
performance by the other party of any provision of this Agreement shall in no
way affect the right to require full performance at any time thereafter, nor
shall the waiver by either party of a breach of any provision of this Agreement
constitute a waiver of any succeeding breach of the same or any other provision,
nor constitute a waiver of the provision itself.
(f) Governing Law. This Agreement shall be governed by and construed
in accordance with the internal laws of the State of New York, without giving
effect to any choice of law or conflict of law provision or rule (whether of the
State of New York or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State
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<PAGE>
of New York. In furtherance of the foregoing, the internal law of the State of
New York shall control the interpretation and construction of this Agreement,
even though under that jurisdiction's choice of law or conflict of law analysis
the substantive law of some other jurisdiction would ordinarily apply.
(g) Headings/No Strict Construction. Section headings contained in
this Agreement are for convenient reference only, and shall not in any way
affect the meaning or interpretation of this Agreement. The language used in
this Agreement is the language chosen by the parties to express their mutual
intent and no rule of strict construction against either party shall apply to
any term or condition of this Agreement.
(h) Attorneys' Fees and Costs. If any legal or other proceedings
arise between the parties relating to this Agreement, the prevailing party shall
be entitled to recover from the non-prevailing party all costs and expenses,
including without limitation reasonable attorneys' fees, incurred by the
prevailing party in connection therewith.
(i) Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but which together will constitute
one and the same instrument.
(j) Mediation. In the event of any dispute hereunder, if the parties
have not resolved such dispute within thirty days either of the parties shall
have the right to submit the matter under dispute to mediation before a mediator
appointed by the presiding officer of the New York office of the American
Arbitration Association. If either party exercises such right, the mediator
shall be directed to establish an aggressive mediation schedule, and during the
period of 60 days from the submission of such disputed matter to such mediation
(i) no litigation may be brought or proceed with respect to such matter and (ii)
no party that is or may be entitled to suspend the performance of its
obligations under this Agreement on account of such disputed matter, if any,
shall suspend such performance on account of such disputed matter. It is
expressly understood and agreed, however, that nothing in this Section 17(j)
shall preclude or delay either party's right to enforce any limitation on the
other party's use or disclosure of information or other items of a confidential
nature or to terminate this Agreement in accordance with its terms.
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<PAGE>
IN WITNESS WHEREOF, the parties have caused their duly authorized
representatives to execute this Agreement as of the date first above written.
ALARM DEVICE MANUFACTURING COMPANY, a Division
of Pittway Corporation
By: /s/ Martin P. Higgins
----------------------------------
Name: Martin P. Higgins
--------------------------------
Title: Executive Vice President
-------------------------------
LIFELINE SYSTEMS, INC.
By: /s/ Richard M. Reich
----------------------------------
Name: Richard M. Reich
--------------------------------
Title: Vice President and Chief
-------------------------------
Information Officer
-------------------
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EXHIBIT 10.66
Termination Agreement, Mutual
Releases and Covenants Not to Sue
This Termination Agreement, Release and Covenant Not to Sue is dated as of
September 2, 1999 and is entered by and among Protection One, Inc., Protection
One Acquisition Holding Corporation, P-1 Merger Sub, Inc. (a Massachusetts
corporation) and P-1 Merger Sub, Inc. (a Delaware corporation) (all of the
foregoing being collectively referred to as the ("P One Entities")) and Lifeline
Systems, Inc. ("Lifeline").
BACKGROUND
The P One Entities and Lifeline are parties to an Amended and Restated
Agreement and Plan of Contribution and Merger dated as of October 28, 1998 (as
amended, the "Contribution and Merger Agreement"). Protection One, Inc. ("P
One") and Lifeline are also parties to a Stock Option Agreement dated as of
October 28, 1998 (the "Stock Option").
The P One Entities and Lifeline wish to terminate the Contribution and
Merger Agreement and P One and Lifeline wish to terminate the Stock Option, and
all such parties wish to exchange mutual releases, on the terms set forth
herein.
Defined terms not defined in this Agreement shall have the meaning set
forth in the Contribution and Merger Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the P One Entities, P One and
Lifeline hereby agree as follows:
1. Termination of Contribution and Merger Agreement. Subject to and
effective upon Lifeline's receipt of the payment provided for in Section 3
hereof, the Contribution and Merger Agreement is hereby terminated pursuant to
Section 8.1(a) thereof.
2. Termination of Stock Option Agreement. Subject to and effective upon
Lifeline's receipt of the payment provided for in Section 3 hereof, the Stock
Option Agreement is hereby terminated pursuant to Section 18(ii) of the Stock
Option.
3. Payment to Lifeline. On or before 5 p.m. (Boston time) on September 9,
1999 (the "Due Date"), P One shall pay to Lifeline $1,000,000 in immediately
available
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<PAGE>
funds. Such payment shall be made by wire transfer to the Lifeline account set
forth in Exhibit A. If such payment is not received by Lifeline on or before the
Due Date, (i) P One shall pay a penalty to Lifeline equal to $5,000 for each day
on or after the Due Date that such payment (together with all such penalties)
has not been received by Lifeline; and (ii) P One shall pay all costs incurred
by Lifeline to collect such payment and penalties (including without limitation
all legal fees).
4. Releases. (a) Subject to and effective upon Lifeline's receipt of the
payment provided in Section 3 hereof, the P One Entities, on behalf of
themselves and their present and former parent and subsidiary corporations,
affiliates, predecessors, successors, assigns, officers, directors, employees,
shareholders, attorneys, accountants, agents, representatives, counsel and
partners, and the present and former shareholders, directors, trustees,
officers, attorneys, accountants, agents, employees, partners, principals,
representatives, counsel, heirs, executors, administrators, successors and
assigns, or any or all thereof (all hereinafter referred to as the "P One
Parties In Interest"), for and in consideration of the mutual covenants,
promises and agreements set forth herein and good and other valuable
consideration, the receipt of which is hereby acknowledged, hereby remise,
release and forever discharge, Lifeline and its present and former parent and
subsidiary corporations, affiliates, predecessors, successors, assigns,
officers, directors, employees, shareholders, attorneys, accountants, agents,
representatives, counsel and partners, and the present and former shareholders,
directors, trustees, officers, attorneys, accountants, agents, employees,
partners, principals, representatives, counsel, heirs, executors,
administrators, successors and assigns, or any or all thereof (all hereinafter
collectively referred to as the "Lifeline Parties In Interest"), from any and
all debts, demands, actions, causes of action, covenants, damages, claims,
rights, liabilities and suits, both in law and in equity, now existing or which
may exist in the future, which the P One Parties in Interest now have or ever
had or hereinafter may have or claim to have against the Lifeline Parties in
Interest based on, arising out of or relating to the negotiation, execution,
performance or termination of the Contribution and Merger Agreement, the Stock
Option or any agreements executed in connection therewith; provided, however,
that this release is not intended to and does not apply to claims based on,
arising out of or relating to (i) obligations of Lifeline or any Lifeline Party
in Interest under the Confidentiality Agreement dated July 13, 1998 between P
One and the Financial Advisor or (ii) a breach of this Agreement.
(b) Subject to and effective upon Lifeline's receipt of the payment
provided in Section 3 hereof, the Lifeline Parties in Interest, for and in
consideration of the mutual covenants, promises and agreements set forth herein
(including the payment set forth in Section 3 hereof), and good and other
valuable consideration the receipt of which is hereby acknowledged, hereby
remise, release and forever discharge the P One Parties in Interest, from any
and all debts, demands, actions, causes of action, covenants, damages, claims,
rights, liabilities and suits, both in law and in equity, now existing or which
may exist in the future, which the Lifeline Parties in Interest now have
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<PAGE>
or ever had or hereafter may have or claim to have against the P One Parties
in Interest based on, arising out of or relating to the negotiation, execution,
performance or termination of the Contribution and Merger Agreement, Stock
Option or any agreements executed in connection therewith; provided, however,
that this release is not intended to and does not apply to claims based on,
arising out of or relating to (i) obligations of P One or any P One Party in
Interest under the Confidentiality Agreement dated July 13, 1998 between P One
and the Financial Advisor or (ii) a breach of this Agreement.
5. Covenant Not to Sue. Each of the P One Entities as against the Lifeline
Parties in Interest, and Lifeline as against the P One Parties in Interest,
covenant and agree not to commence, prosecute or cause, permit or advise to be
commenced or prosecuted against the other any action or proceeding related in
any way to the claims being released hereby.
6. Return of Confidential Information. P One agrees to return or destroy
all Confidential Information received pursuant to the Lifeline Confidentiality
Agreement within 5 business days, and to certify to such return and/or
destruction as required by said agreement. Lifeline agrees to return or destroy
all information received from P One that was marked or identified as
confidential information.
7. Miscellaneous. This Agreement shall be governed in all respects,
including validity, interpretation and effect, by the internal laws of The
Commonwealth of Massachusetts, without giving effect to the principles of
conflict of laws thereof. This Agreement may be executed one or more
counterparts which together shall constitute a single agreement.
IN WITNESS WHEREOF, each of the P One Entities and Lifeline have caused
this Agreement to be executed as of the date first written above.
PROTECTION ONE, INC.
/s/ Anthony D. Soma
---------------------------------------
By: Anthony D. Soma
Title: Chief Financial Officer
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<PAGE>
PROTECTION ONE
ACQUISITION HOLDING
CORPORATION
/s/ Anthony D. Soma
---------------------------------------
By: Anthony D. Soma
Title: Chief Financial Officer
P-1 MERGER SUB, INC.
(a Massachusetts corporation)
/s/ Anthony D. Soma
---------------------------------------
By: Anthony D. Soma
Title: Chief Financial Officer
P-1 MERGER SUB, INC.
(a Delaware corporation)
/s/ Anthony D. Soma
---------------------------------------
By: Anthony D. Soma
Title: Chief Financial Officer
LIFELINE SYSTEMS, INC.
/s/ Ronald Feinstein
---------------------------------------
By: Ronald Feinstein
Title: President and Chief Executive
Officer
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<PAGE>
EXHIBIT 10.67
SECOND AMENDMENT OF LEASE
THIS SECOND AMENDMENT OF LEASE (this "Amendment") is hereby entered into as
of the 18/th/ day of November, 1999 by Bishop 108 Associates Limited Partnership
(the "Landlord") and Lifeline Systems, Inc. (the "Tenant").
WITNESSETH:
WHEREAS, reference is hereby made to that certain Lease, dated as of
November 17, 1997, as amended by that certain First Amendment of Lease dated as
of June 30, 1998 (as so amended, the "Lease") entered into by and between the
Landlord and the Tenant; and
WHEREAS, any capitalized term used and not defined herein shall have the
meaning set forth in the Lease; and
WHEREAS, the Landlord and the Tenant have agreed that the Tenant shall pay
the Cost Difference by paying to the Landlord a lump sum amount and by paying
increased Rent, all as set forth below; and
WHEREAS, the Landlord and the Tenant desire to amend the Lease to
incorporate said agreement as set forth below
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and notwithstanding anything
contained in the Lease to the contrary, the Landlord and Tenant hereby agree as
follows:
1. Simultaneously with the execution of this Amendment by the Tenant, the
Tenant shall pay Four Hundred Twenty Thousand, Seven Hundred Twenty-Seven and
50/100 Dollars ($420,727.50) (the "First Lump Sum Payment") to the Landlord. The
First Lump Sum Payment consists of: (a) a one-time payment to the Landlord in
the amount of Three Hundred Seventy-Five Thousand Dollars ($375,000.00); and (b)
an additional payment of Base Rent in the amount of Forty-Five Thousand, Seven
Hundred Twenty-Seven and 50/100 Dollars ($45,727.50) (the "Retroactive Increase
in Base Rent"). The Retroactive Increase in Base Rent is for the period from the
Term Commencement Date (which is November 1, 1998) through and including
November 30, 1999 and was calculated by multiplying Fifty Cents (.50) per annum
per rentable square foot of space in the Leased Premises (which the parties
irrevocably agreed in the Lease is 84,420 square feet of rentable floor space).
The failure of the Tenant to pay the First Lump Sum Payment to the Landlord
within three (3) business days after the execution of this Amendment by the
Tenant, Landlord and Lender (hereafter defined) shall be deemed to be a default
by the Tenant in the payment of Rent due under the Lease.
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<PAGE>
2. On or before October 1, 2000, the Tenant shall pay to the Landlord
Forty Thousand and 00/100 Dollars ($40,000.00) (the "Second Lump Sum Payment").
The failure of the Tenant to pay the Second Lump Sum Payment to the Landlord on
or before October 1, 2000 shall be deemed to be a default by the Tenant in the
payment of Rent due under the Lease.
3. The definition of "Original Lease Term" set forth in Section 1.1 of the
Lease is hereby deleted in its entirety and the following definition is hereby
substituted therefor: "Original Lease Term: Fifteen (15) Lease Years commencing
on the Term Commencement Date and ending on the last day of the fifteenth Lease
Year."
4. Section 3.2.1 of the Lease is hereby deleted in its entirety and the
following section is substituted therefor:
3.2.1 Base Rent Tenant shall pay Base Rent as follows:
---------
(a) Lease Years 1-5: For the period commencing on the Term
---------------
Commencement Date and continuing through and including the last day of
the fifth (5th) Lease Year, the Base Rent shall be at the annual rate of
Eight Hundred Thirteen Thousand, Nine Hundred Ninety Dollars
($813,990.00) and shall be payable in equal monthly installments, in
advance, each in the amount of Sixty-Seven Thousand, Eight Hundred
Thirty-Two and 50/100 Dollars ($67,832.50). Said annual rate of Base
Rent was calculated by multiplying Nine and 50/100 Dollars ($9.50) by
the number of square feet of rentable space in the Leased Premises
(which the parties irrevocably agree is 84,420 square feet of rentable
floor space) and adding Twelve Thousand Dollars ($12,000); and
(b) Lease Years 6-10: For the period commencing on the first day
----------------
of the sixth (6/th/) Lease Year and continuing through and including the
last day of the tenth (10/th/) Lease Year, the Base Rent shall be at the
annual rate of Nine Hundred Nineteen Thousand, Five Hundred Fifteen and
00/100 Dollars ($919,515.00) and shall be payable in equal monthly
installments, in advance, each in the amount of Seventy-Six Thousand,
Six Hundred Twenty-Six and 25/100 Dollars ($76,626.25) Dollars
($76,626.25). Said annual rate of Base Rent was calculated by
multiplying Ten and 75/100 Dollars ($10.75) by the number of square feet
of rentable space in the Leased Premises (which the parties irrevocably
agree is 84,420 square feet of rentable floor space) and adding Twelve
Thousand Dollars ($12,000); and
(c) Lease Years 11-15: For the remainder of the Original Lease
-----------------
Term, the Base Rent shall be at the annual rate of One Million, Eighty-
Eight Thousand, Three Hundred Fifty-Five and 00/100 Dollars
($1,088,355.00) and shall be payable in equal monthly installments, in
advance, each in the amount of Ninety Thousand,
2
<PAGE>
Six Hundred Ninety-Six and 25/100 Dollars ($90,696.25) Dollars. Said
annual rate of Base Rent was calculated by multiplying Twelve and 75/100
Dollars ($12.75) by the number of square feet of rentable space in the
Leased Premises (which the parties irrevocably agree is 84,420 square
feet of rentable floor space) and adding Twelve Thousand Dollars
($12,000).
5. The first two sentences of Section 3.2A are hereby deleted in their
entirety and the following sentences are substituted therefor:
Tenant shall have the right to seek, at the Tenant's expense, a "TIF"
agreement with the Town of Framingham (the "Town") to reduce the real
estate taxes assessed against the Property. After January 1, 2000, Landlord
shall cooperate with Tenant in Tenant's efforts to obtain such a TIF
agreement provided that Landlord shall not be subjected to any liability
for the payment of any costs or expenses in connection therewith, and
Tenant shall indemnify and save harmless Landlord from any such costs and
expenses.
6. The second sentence in Section 3.3(1) is hereby deleted in its entirety
and the following sentence is substituted therefor: "The "Base Amount" shall be
the amount of the real estate taxes imposed, assessed or levied upon the
Property by the Town for the year beginning on July 1, 1999 and ending on June
30, 2000 without regard to any reduction in the real estate taxes levied on the
Property by the Town pursuant to any TIF agreement between the Tenant and the
Town."
7. Landlord and Tenant agree that this Second Amendment represents a full
and final settlement of all disputes regarding the Cost Difference.
8. Promptly after the execution and delivery hereof by all parties,
Landlord and Tenant shall execute and deliver, and Tenant may cause to be
recorded at its expense, an amendment to the existing Notice of Lease on record
in Middlesex South Registry of Deeds and the Middlesex South Registry District
of the Land Court reflecting the change in the definition of the Original Lease
Term.
9. The Lease, as amended by this Amendment, is hereby ratified and
confirmed and is in full force and effect.
10. Notwithstanding anything contained herein to the contrary, this Second
Amendment shall not be deemed to be effective unless and until the holder of the
mortgage on the Property, CIBC Inc. ("Lender") consents to this Second Amendment
by signing below. Landlord represents that Lender is the only holder of a
mortgage on the Property and that no other consent or approval is required in
order for this Lease Amendment to be binding upon Landlord.
3
<PAGE>
11. This Amendment may be executed in any number of counterparts with the
same effect as if all parties hereto had signed the same instrument. All
counterparts shall be construed together and shall constitute one original
instrument.
In Witness Whereof, the parties hereto have executed this Amendment under
seal as of the date first written above.
LANDLORD: TENANT:
BISHOP 108 ASSOCIATES LIMITED LIFELINE SYSTEMS, INC.
PARTNERSHIP
By: BISHOP 108 CORPORATION
the sole General Partner
By: /s/ Donald A. Levine By: /s/ Dennis M. Hurley
--------------------- ---------------------
Donald A. Levine, President Dennis M. Hurley
Vice President of Finance
Lender joins in this Agreement for the purpose of consenting to this Second
Amendment to Lease, and confirming that, for the purposes of that certain
Subordination, Non-Disturbance and Attornment Agreement dated as of July 27,
1998 recorded in Middlesex County Registry of Deeds as Instrument No. 1352 on
July 27, 1998 and filed with the Middlesex County Registry District of the Land
Court as Document No. 1075583, the "Lease" as defined therein shall mean the
Lease as modified by this Second Amendment of Lease.
LENDER:
CIBC INC.
By: /s/ Ryan P Sparks
------------------
Name: Ryan P. Sparks
Title: Assistant Asset Manager
4
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF LIFELINE SYSTEMS, INC.
Lifeline Systems Securities Corporation
111 Lawrence Street
Framingham, Massachusetts 01702-8156
Incorporated in the Commonwealth of Massachusetts
Lifeline Systems Canada, Inc.
95 Barber Greene Road
North York, Ontario, Canada M3C 3E9
Incorporated in the Province of Ontario, Canada
Lifeline Systems Export, Inc.
The Financial Services Centre
Bishops Court Hill
St. Michael, Barbados
Incorporated in the Country of Barbados
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the registration
statements of Lifeline Systems, Inc. on Form S-8 (File Nos. 33-40684, 33-58632,
33-79294, 33-59499, 333-03949, 333-03953, and 333-03951) of Lifeline Systems,
Inc. of our report dated February 7, 2000, on our audits of the consolidated
financial statements and financial statement schedule of Lifeline Systems, Inc.
as of December 31, 1999 and 1998 and for each of the three years in the period
ended December 31, 1999, which report is included in this Annual Report on Form
10-K.
/s/ PricewaterhouseCoopers LLP
---------------------------------
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 30, 2000
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<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,415
<SECURITIES> 0
<RECEIVABLES> 9,953
<ALLOWANCES> 706
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<PP&E> 43,815
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0
0
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<OTHER-SE> 44,436
<TOTAL-LIABILITY-AND-EQUITY> 57,385
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<CGS> 6,305
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<OTHER-EXPENSES> 31,665
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<INCOME-PRETAX> 4,176
<INCOME-TAX> 1,670
<INCOME-CONTINUING> 2,506
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